9M18 realised distributable income (RDI) of RM513m came in within our and consensus estimates at 71% and 70%, respectively. 9M18 NDPS of 24.39 sen is broadly within (69%). Maintain FY18-FY19E CNPs of RM719-732m. Maintain UNDERPERFORM on an unchanged TP of RM6.90 as KLCC’s net yield of 4.7% is below large-cap MREITs’ average yield of 5.9%.

9M18 realised distributable income (RDI) of RM513m is within our and consensus estimates at 71% and 70%, respectively. 3Q18 GDPS of 8.70 sen (2.99 sen single-tier dividend plus 5.71 sen subject to 10% withholding tax), translates to NDPS of 8.13 sen, bringing 9M18 NDPS to 24.39 sen. We deem this as broadly within expectations at 69% of our FY18E NDPS of 35.4 sen as we expect a higher pay-out in 4Q, which is usually the norm in previous years.

Results highlight. YoY-Ytd, top-line was up marginally (+2%) on improvements from all segments; (i) the hotel segment (+6%) on higher occupancy and room rates post refurbishment, (ii) office segment (+1%) on full occupancy at Menara Exxon Mobil, (iii) retail segment (+2%) on higher rental rates, and (iv) management services segment (+4%) on new contracts. This coupled with lower interest expense (-4%) upon repayment of borrowings, and lower taxation (-4%) caused bottom-line to increase by 4%. QoQ, top-line was almost flattish, up only by 1% as positive growth from: (i) hotel (+23%) and (ii) retail segment (+1%), was offset by lower contributions from the management services segment (- 8%), while office segment was flat. This translated directly t be bottom- line, which increased by 1% as well, despite vaguely lower PBT margin (-0.4ppt) due to: (i) slightly higher operating cost, likely from the hotel segment, and (ii) marginal increase in financing cost (+2%).

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 are still under development and are unlikely to be injected during the greenfield phase, while completion of construction is in 2022.

Maintain FY18-19E CNPs of RM719-732m, with growth driven by low single-digit rental step-ups, 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 RM6.90. Our TP is based on an unchanged target gross/net yield of 5.6%/5.2% and unchanged FY19E GDPS/NDPS of 38.5 sen /36.0 sen on a +1.4ppt to our 10-year MGS target of 4.20%. Note that our applied spread is the lowest among MREITs under our coverage (1.4ppt to 3.3ppt) attributable to KLCC’s high-quality asset profile which provides strong earnings stability, as well as the fact that KLCC is one of the few Shariah compliant MREITs. However, we maintain our UNDERPERFORM call as we believe valuations are exhausted at current levels, while net yield of 4.7% in FY19E is below large cap MREIT peers’ average of 5.9%.

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 - 14 Nov 2018