1Q18 realised distributable income (RDI) of RM171m came in within our (24%) and consensus (23%) estimates. 1Q18 NDPS of 8.13 sen is also within (23%). Maintain FY18-FY19E CNP. However, we downgrade our call to UNDERPERFORM (from MP) on an unchanged TP of RM7.00 as share price has rallied (+5%) alongside the FBMKLCI (+0.6%) post the recent general election, but we remain conservative by still pricing in oversupply and valuations risks.

1Q18 realised distributable income (RDI) of RM171m is within our and consensus estimates at 24% and 23%, respectively. 1Q18 GDPS of 8.70 sen, (2.98 sen single-tier dividend plus 5.72 sen subject to 10% withholding tax), translate to NDPS of 8.13 sen. This is also within expectation at 23% of our FY18E NDPS of 35.4 sen.

Results highlight. YoY-Ytd, top-line was up (+3%) on improvements from; (i) the hotel segment (+12%) on higher occupancy and room rates, (ii) office segment (+2%) on full occupancy at Menara Exxon Mobil, and (iii) retail segment (+2%) on positive reversions, while the management services segment remained flattish. PBT margins were fairly stable at 68% as higher operating cost (+6%) was offset by lower financing cost (-10%) upon repayment of borrowings in 2Q17. All in, bottom-line increased in tandem with top-line (+3%). QoQ, top-line was down (-2%) on weaker contributions from: (i) the hotel segment (-9%) on lower banqueting revenues as 4Q is a seasonally stronger quarter, and (ii) management services segment (-3%), while the office and retail segments were fairly flattish. This coupled with higher financing cost (+7%), and marginally higher effective tax rates of 10.8% (vs. 9.4% in 4Q17) caused RDI to decline by 3%.

Outlook. The Group remains positive on its lookout to acquire assets, and has renewed its shareholders’ approval for a 10% placement in Apr 2018. As for Phase 3 of Menara Dayabumi, management will focus on securing an anchor tenant before proceeding with the development, while the tendering process is under way. Phase 3 is expected to comprise a 60-storey tower of mixed development, consisting retail, office and hotel portion and will likely be completed in FY21-22.

Maintain FY18-19E CNP of RM719-732m. 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.

Downgrade to UNDERPERFORM (from MP) but maintain our TP of RM7.00. Our TP is based on an unchanged target gross/net yield of 5.4%/5.1% on an unchanged FY18E GDPS/NDPS of 37.8 sen/35.4 sen on +1.4ppt to our 10-year MGS target of 4.00%. Note that our applied spread is +0.5SD above historical averages to encapsulate investors’ concerns of oversupply issues and OPR hikes but, we may look to remove this going forward once confidence returns to the sector (i.e. consistent earnings delivery suggesting that oversupply fears for REITs are exaggerated, and confirmation of a low probability of a second OPR hike). However, KLCC’s share price has rallied (+5%) over the past three days alongside the FBMKLCI (+0.6%), both post the recent general elections (GE) on 9th May 2018. As such we downgrade it to UNDERPERFORM for now as we are still pricing in oversupply and OPR concerns that may affect valuations. Furthermore, at current levels, KLCC’s FY18E net yield of 4.5% (gross: 4.8%) is below MREITs’ average of 5.5% (gross: 6.1%).

Source: Kenanga Research - 17 May 2018