1Q17 core earnings of RM166m came in within both ours and markets expectations, at 22%. 1Q17 NDPS of 8.05 sen was also within (22%) our FY17E NDPS of 37.1 sen. We maintain FY17-18E earnings of RM752-765m. We make no changes to our MARKET PERFORM call but increase TP to RM7.97 (from RM7.84) post rolling forward to FY18E GDPS/NDPS of 40.3 sen/37.7 sen on a +0.85ppt to our 10- year MGS target.

1Q17 RDI within our and markets’ expectations at 22%. 1Q17 realized distributable income (RDI) of 166m came in within both ours and consensus estimates at 22%, respectively. 1Q17 GDPS of 8.60 sen (3.10 sen single tier dividend plus 5.50 sen subject to 10% withholding tax), was also within expectations, making up 22% of our FY17E NDPS of 37.1 sen.

Results highlights. QoQ, RDI was flattish, (-1%) on the back of slightly lower topline (-2%) on slight declines from; (i) the hotel segment (-10%) due to fewer banqueting events in 1Q17, (ii) retail segment (-3%) likely on lower tenant sales, and (iii) marginal decline from the office segment (-1%) due to the re-lease of c.40% of the leased area in Menara ExxonMobil in Jan-17, which is expected to be tenanted by 2Q17. All in, lower interest expense (-2%) and lower contributions from minority interest (-41%) resulted in fairly flattish bottom-line. YoY-Ytd, top line was flattish (+1%) on slight declines to the office (-1%) and retail segment (-1%) due to similar reasons mentioned above, while the hotel segment saw some improvements (+7%) on the back of higher occupancy, and management services segment saw improvements (+7%) from facility management works in Kerteh since June-16. However, PBT declined by 3%, on lower PBT margins (-2.4ppt) due to higher operating cost from the hotel and management services segment, and lower interest income (-2%). All in, RDI declined by 4%.

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%, which is expected to be complete by 2Q17. The Group remains on the lookout to acquire assets, but has yet to renew its shareholders’ approval for a placement which lapsed in Apr-17.

Maintain FY17-18E earnings. We maintain FY17-18E NP of RM752- 765m. Our FY17-18E NDPU are 37.1-37.7 sen which translates to 4.7-4.8% net yield.

Maintain MARKET PERFORM but increase TP to RM7.97 (from RM7.84), based on an unchanged target gross/net yield of 5.1%/4.5% and post rolling forward to FY18E GDPS/NDPS of 40.3 sen/37.7 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%), warranting a MP call, while 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 May 2017