FY17 realised distributable income (RDI) of RM672m came in within our estimate at 96%, but slightly below consensus at 93%. The deviation from consensus was likely on bullish RDI margins, as top-line came in within. FY17 NDPS of 34.1 sen is also within our FY17E NDPS of 34.5 sen (99%). Maintain FY18E CNP of RM719m and introduce FY19E CNP of RM732m. Maintain MARKET PERFORM and TP of RM7.73.

FY17 realised distributable income (RDI) of RM672m is within our estimate at 96% but slightly below consensus at 93%. We believe RDI came in slightly below consensus estimates due to bullish RDI margins, as top-line is within expectations at 97%. 4Q17 GDPS of 10.35 sen, (5.30 sen single-tier dividend plus 5.05 sen subject to 10% withholding tax), translate to NDPS of 9.85 sen, bringing FY17 NDPS to 34.1 sen. This is also within expectation at 99% of our FY17E NDPS of 34.5 sen.

Results highlights. YoY-Ytd, top-line was up slightly (+2%) on; (i) improvements from the hotel segment (+12%) from higher occupancy and room rates, and (ii) management services segment (+5%) from its Kerteh properties, while the retail and office segment remain flattish. However, higher operating cost (+41%) and lower interest income (- 32%) dragged down PBT margins (-0.5ppt). All in, RDI was flat. QoQ, top-line was up by (+3%) on improved performance in the hotel segment due to similar reasons mentioned above, and stable contributions from the other segments. However, lower interest expense (-9%) and taxation (-19%) caused RDI to increase by 6%.

Outlook. The Group remains positive 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%.

Maintain FY18E CNP of RM719m and introduce FY19E CNP of RM732m. The expected growth in FY18-19 is to be driven by modest rental step-ups (low single-digit), and improvement of occupancy to 60% (from 50%) for Mandarin Oriental. FY18-19E NDPS of 35.4-36.0 sen implies 4.5-4.6% 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% on an unchanged FY18E GDPS/NDPS of 37.8 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, with most office assets 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 4.5% (gross: 4.9%) is slightly below MREITs’ average of 5.3% (gross: 5.9%),

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 - 25 Jan 2018