FY16 core earnings of RM675m came in within our (96%) but below market (91%) expectations. FY16 NDPS of 33.4 sen was also within (96%) our FY16E NDPS of 34.9 sen. We maintain FY17E earnings and introduce FY18E numbers. The renewed shareholders’ approval (on 13th April 2016) for a 10% placement could raise RM1.3-1.4b for asset acquisitions. We make no changes to our MARKET PERFORM call and TP of RM7.84

FY16 RDI within our expectations at 96%. FY16 realized distributable income (RDI) of 675m came in within our but below consensus estimates at 96% and 91%, respectively. The deviation with consensus was likely due to lower tax rate and minority interest assumptions. 4Q16 GDPS of 9.85 sen (4.17 sen single tier dividend plus 5.68 sen subject to 10% withholding tax), implies FY16 net DPS of 33.4 sen which was within expectations, making up 96% of our FY16E NDPS of 34.9 sen.

Maintaining stable YoY growth. RDI was flat QoQ, a result of a higher operating cost (+10%) on the back of modest top line growth (+5%) mostly from improvements in the retail and hotel segments on low single-digit reversions. Additionally, associate contribution decreased in 4Q16 due to delayed payment from associate, which will materialize in 1Q17. The quarter also saw RM171m revaluation gain. YoY-Ytd, top line was flattish on stable office and retail segments despite a weaker hotel segment (-4%) due to tough market conditions and renovation works for the presidential suite, Sultan Lounge and Casbah, but RDI was up by 5% on lower operating cost and lower taxation (-20%) from higher contributions from KLCC REIT as it was not subject to taxation.

Outlook. Management has renewed Menara ExxonMobil’s lease (expiring end Jan 2017) for 9+3+3+3 years with ExxonMobil retaining 60% of the building while management has already identified a tenant for the remaining 40%. The Group remains on the lookout for assets for acquisition, and has renewed its shareholders’ approval (during the AGM on 13th Apr 2016) for a 10% placement, which is valid for 12 months, possibly raising between RM1.3b to RM1.4b.

Maintain FY17E earnings and introduce FY18E. We maintain FY17E NP of RM752m, and introduce FY18E NP of RM765m. Our FY17-18E NDPU are 37.2-37.9 sen which translates to 4.76-4.84% net yield.

Maintain MARKET PERFORM and TP of RM7.84, based on an unchanged target gross/net yield of 5.1%/4.5% on FY17E GDPS/NDPS of 39.6 sen/37.2 sen on a +0.85ppt to our 10-year MGS target of 4.20%. KLCC is one of the preferred MREITs for investors seeking flights to safety recommendations due to its strong asset stability as most office assets are on long-term leases (i.e.15 years) and on a TNL basis, while gearing remains low, allowing for sizeable acquisition potential. Further clarity on its acquisition pipeline will be a positive re-rating catalyst. At current levels, KLCC’s FY17E net yield of 4.7% (gross: 5.1%) is slightly below MREITs’ average of 5.0% (gross: 5.5%), and we believe KLCC will remain a preferred pick due to its earnings and share price 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 - 23 Jan 2017