We attended KLCC’s 1H17 briefing yesterday and came away feeling neutral on the Group’s future prospects. The retail segment remains stable on positive reversions, and the office segment is back to full occupancy, while the hotel segment is still loss-making at PBT level. All in, we make no changes to FY17-18E earnings of RM700-719m. Maintain MARKET PERFORM and TP of RM7.80 on FY18E GDPS/NDPS of 37.8 sen/35.4 sen.

1H17 PBT down slightly (-1.5%) on hotel and management services segments. To recap, YoY-Ytd, top-line was flattish (+1%) but, PBT was down (-1.5%) dragged down by: (i) hotel segment (-68%) due to higher operating cost as occupancy is still low at 46.7% and unable to cover fixed cost, and (ii) management services (-8.3%) due to overprovision adjustment in 2Q16 for manpower cost and lower interest income. The retail segment also saw some slight PBT declines (-1.2%) due to a back charge of rental from a tenant in 2Q16, while the office segment was flattish YoY-Ytd (+0.5%), but was up QoQ (+2.1) on a new lease contract at Menara ExxonMobil (refer overleaf).

Menara ExxonMobil fully occupied as at 2Q17 as the Group secured a new tenant, Petronas in April 2017. Menara ExxonMobil’s lease expired end Jan 2017, but management only managed to retain 60% of the building then. However, the remaining space was swiftly taken up by a new tenant, Petronas in Apr 2017, implying that 40% the asset was rent-free for only two months. We believe the impact to the Group is minimal with the loss of two months rental, making up only c. 0.2% of top-line which we deem negligible. However, we like the fact that the asset is now back to full occupancy, and the new tenant is on a long- term lease of three years with the option to renew for five consecutive terms, while step up is 3% p.a on a 3-year compounded basis. This is despite the tough office market conditions in the Klang Valley.

Status update on Phase 3 of Menara Dayabumi. To date, the group has completed the demolition of City Point podium and commenced the substructure works. To recap, Phase 3 will comprise a 60-storey tower of mixed development, consisting retail, office and hotel portion and we estimate that this may cost close to RM0.5b; it will likely be financed by their Sukuk Murabahah program. Management has indicated that they will not be providing guidance on CAPEX going forward due to sensitivity of contract pricings, while this project may be completed later than expected in FY20-21 (vs. FY19 previously).

We make no changes to FY17-18E of RM700-719m. Note that we have lowered our earnings by 7-6% for FY17-18E yesterday as 1H17 results came in below our and consensus expectations at 44% on a lower RDI pay-out of net profit. FY17-18E NDPS of 34.5-35.4 sen implies 4.4-4.5% yields

Maintain MARKET PERFORM and TP of RM7.80. Our TP is based on an unchanged target gross/net yield of 4.9%/4.5% and FY18E GDPS/NDPS of 37.8 sen /35.4 sen on a +0.85ppt to our 10-year MGS target of 4.00%. We like KLCC for 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. However, at current levels, KLCC’s FY18E net yield of 4.5% (gross: 4.8%) is slightly below MREIT’s average of 5.1% (gross: 5.7%), warranting a MARKET PERFORM call.

Downside risks to our call include: (i) bond yield expansions, (ii) flattish to negative rental reversions, and (iii) weaker-than-expected occupancy rate.

Source: Kenanga Research - 17 Aug 2017