1H18 realised distributable income (RDI) of RM341m came in within our and consensus estimates at 47% and 46%, respectively. 1H18 NDPS of 16.26 sen is also within (46%). Maintain FY18-FY19E CNP of RM719-732m. Maintain UNDERPERFORM on an unchanged TP of RM6.80 as KLCCP’s net yield of 4.6% is below large cap MREITs’ average yield of 5.3%.

1H18 realised distributable income (RDI) of RM341m is within our and consensus estimates at 47% and 46%, respectively. 2Q18 GDPS of 8.70 sen (3.05 sen single-tier dividend plus 5.65 sen subject to 10% withholding tax), translate to NDPS of 8.14 sen, bringing 1H18 NDPS to 16.26 sen. This is also within expectation at 46% of our FY18E NDPS of 35.4 sen.

Results highlight. YoY-Ytd, top-line inched up (+2%) on improvements from all segments; (i) the hotel segment (+7%) on higher occupancy and room rates, (ii) office segment (+1%) on full occupancy at Menara Exxon Mobil, (iii) retail segment (+1%) on positive reversions, and (iv) management services segment (+6%) on new contracts. PBT margins remained flattish at 68% as higher operating cost (+6%) was offset by lower financing cost (-6%) upon repayment of borrowings. All in, bottom-line increased by 4%. QoQ, while top-line was flat as the office and retail segment remained flattish, while slight improvements in the management services segment (+13%) was offset by a decline in the hotel segment (-15%) due to postponement of events in 2Q18 being the election period. However, higher operating cost (+2%) and a marginal increase in financing cost (+1%) caused bottom-line to decrease marginally by 1%.

Outlook. The Group had previously renewed its shareholders’ approval for a 10% placement in Apr 2018. Phase 3 of Menara Dayabumi in still in the tendering process as management focuses on securing an anchor tenant before proceeding with the development. Phase 3 is expected to comprise of a 60-storey tower of mixed development, consisting retail, office and hotel portion and will likely be completed in FY21-22. Lot 185 and Lot M is still under development and is unlikely to be injected during the greenfield phase, while completion of construction is in 2022.

Earnings unchanged. We maintain FY18-19E CNP of RM719-732m, with growth 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 4.6-4.7% yields.

Maintain UNDERPERFORM and TP of RM6.80. Our TP is based on an unchanged target gross/net yield of 5.0%/4.6% on an unchanged FY18E GDPS/NDPS of 37.8 sen /35.4 sen on a +1.4ppt to our 10-year MGS target of 4.20%. Our applied spread is +0.5SD above historical average to serve as a buffer for near-term fluctuations to the MGS on oversupply issues and interest rate hikes, but we may look to remove this going forward once confidence returns to MREITs’ valuations. We maintain our UNDERPERFORM call, which is premised on our lacklustre outlook for the sector as we remain conservative on valuations. With most of the foreseeable positives already priced in, we are comfortable with our call as KLCCP’s net yield of 4.6% is below large cap MREIT peers’ average of 5.3%.

Risk to our call include: (i) bond yield compression, (ii) higher-than- expected rental reversions, and (iii) stronger-than-expected occupancy rates.

Source: Kenanga Research - 16 Aug 2018