9M17 core earnings of RM496m came in within our expectation at 71%, but slightly below consensus expectations at 67%. The deviation from the consensus was likely on bullish RDI margins, as top-line came in within estimate. 9M17 NDPS of 24.2 sen was also within our FY17E NDPS of 34.5 sen (70%). We make no changes to FY17-18E of RM700-719m. Maintain MARKET PERFORM and TP of RM7.73.

9M17 realised distributable income (RDI) is within our expectation at 71% but slightly below consensus expectation at 67%. We reckon 9M17 realized distributable income (RDI) of 496m came in slightly below consensus estimate due to slightly bullish RDI margins, as top-line was within expectations at 72%. 3Q17 GDPS of 8.60 sen, (3.64 sen single-tier dividend plus 4.96 sen subject to 10% withholding tax), translate to NDPS of 8.10 sen, bringing 9M17 NDPS to 24.2 sen. This is also within expectation at 70% of our FY17E NDPS of 34.5 sen.

Results highlights. YoY-Ytd, top-line was up slightly (+2%) supported by: (i) improvement from the hotel segment (+12.1%) on better occupancy during the SEA Games in August 2017 and stronger performance of the newly renovated Club rooms and suites, and (ii) management services segment (+4.1%). The retail (+0.2%) and office (- 0.3%) segments remained fairly flattish. However, higher operating cost (+7%) and lower interest income (-32%) dragged down PBT margins (- 1.5ppt). All in, RDI declined by 2%. QoQ, RNI was up by (+1%) on improved performance for the hotel segment on similar reasons mentioned above, and stable contributions from the other segments. PBT margin was stable at (+0.3ppt), resulting in RDI increasing by 2%.

Outlook. The Group is still on the lookout to acquire assets, and has renewed its shareholders’ approval for a 10% placement in Apr 2017. 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%. *Note that we make no changes to FY17-18E NP of RM700-719m. FY17-18E NDPS of 34.5-35.4 sen implies 4.4-4.6% yields.

Maintain MARKET PERFORM and TP of RM7.73. Our TP is based on an unchanged target gross/net yield of 4.9%/4.5% with FY18E GDPS/NDPS of 37.5 sen /35.4 sen on a +0.9ppt to our 10-year MGS target of 4.00%. We are comfortable with our MARKET PERFORM call as we believe KLCC has minimal downside risk due to its strong asset stability, as most of its office assets are on long-term leases (i.e. 15 years) and 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 FY18E net yield of 4.6% (gross: 4.9%) is slightly below MREITs’ average of 5.2% (gross: 5.8%),

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 - 14 Nov 2017