1H16 core earnings of RM339.1m was well within our (48.1%) and market (45.3%) expectations. 1H16 NDPS of 16.1 sen was within, making up 46.0% of our FY16E NDPS of 34.9 sen. Earnings forecasts are maintained. The company renewed its shareholders’ approval (13th April 2016) for a 10% placement which could potentially raise between RM1.3-1.4b, which is valid for 12 months, but the group is still on the lookout for potential assets. We make no changes to our OUTPERFORM call and TP of RM8.25.
1H16 RDI within our expectations at 48%. 1H16 realized distributable income (RDI) of RM339.1m came in within consensus and our estimates at 45.3% and 48.1%, respectively. 2Q16 GDPS of 8.60 sen (2.91 sen single-tier dividend plus 5.69 sen subject to 10% withholding tax), implies a 1H16 net DPS of 16.1 sen which makes up 46% of our FY16E NDPS of 34.9 sen.
Maintaining stable growth YoY. RDI was down QoQ by 3%, on the back of a flattish top line, while PBT margin was lower (-1.7ppt), mainly on higher operating cost (+7%) and higher interest expense (+3%). YoY-Ytd, top line growth was stable at 2%, mainly driven by the retail (+2.2%) and hotel (+7.5%) segments, while the office segment remained flattish. Despite the hotel segment seeing an increase in revenue, the segment suffered losses at PBT level due to overall weaker market conditions. However, the impact to bottom line was minimal as net profit increased by 1%, while RDI increased by 6% due to a higher portion of distributable income of net profit (94% vs. 89% in 1H15). KLCC’s balance sheet remains healthy with a gross gearing of 0.20x.
Outlook. KLCC recently renewed its shareholders’ approval during the AGM on 13th Apr-2016 to issue up to 10% placement, which is valid for 12 months, which could potentially raise funds of between RM1.3b to RM1.4b. Going forward, management indicated that they are still on the lookout for potential assets, but so far nothing concrete has materialised. Potential assets are: (i) the remaining stake in Suria KLCC not owned (only 60% owned), (ii) assets under the parent - (KLCC Convention Centre, Traders Hotel and Impiana Hotel), and (iii) third party assets within the Golden Triangle (refer overleaf). Note that we make no changes to our FY16-17E earnings of RM705-752m.
Maintain OUTPERFORM and TP of RM8.25, which is based on an unchanged target gross/net yield of 4.8%/4.5% on FY17E GDPS/NDPS of 39.6 sen/37.2 sen on a +1.2ppt to our 10-year MGS target of 3.60%. We are comfortable with our OUTPERFORM call as investors search for flight to safety recommendations. We believe KLCC would be one of the preferred MREITs due to its strong asset stability as most office assets are on long-term leases (i.e.15 years) and on a triple-net-lease (TNL) basis, while gearing remains low, allowing for sizeable acquisition potential. Additionally, further clarity on its acquisition pipeline will be a positive catalyst. At current levels, KLCC’s FY17E net yield of 4.9% (gross: 5.3%) is just slightly below MREITs average of 5.1% (gross: 5.6%), but we reckon it will continue to be a preferred pick due to its earnings stability.
Downside risks to our call include: (i) bond yield expansions, (ii) flattish to negative rental reversions, and (iii) weaker-than-expected occupancy rates.
Source: Kenanga Research - 3 Aug 2016
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