FY18 RDI of RM698m came in within our and consensus estimates at 97% and 96%, respectively. FY18 NDPS of 34.7 sen is also within (98%). Maintain FY19E CNP of RM732m and introduce FY20E numbers. Maintain UNDERPERFORM on an unchanged TP of RM6.90 as KLCC’s net yield of 4.6% is way below large-cap MREITs’ average net yield of 5.3%.

FY18 realised distributable income (RDI) of RM698m is within our and consensus estimates at 97% and 96%, respectively. 4Q18 GDPS of 10.90 sen (4.63 sen single-tier dividend plus 6.27 sen subject to 10% withholding tax), translates to NDPS of 10.27 sen, bringing FY18 NDPS to 34.7 sen. This is also within expectation at 98% of our FY18E NDPS of 35.4 sen (implying 4.4% net yield).

Results highlight. YoY-Ytd, top-line was up marginally (+3%) on improvements from all segments; (i) office segment (+1%) on full occupancy at Menara Exxon Mobil, (ii) retail segment (+3%) on higher rental rates, (iii) hotel segment (+3%) on improved occupancy, and (iv) management services segment (+7%) on new contracts. All in, bottom- line inched up by 4% aided by lower financing cost (-1%) despite higher operating expenses (+8%) from manpower and chiller cost. QoQ, top- line was up by 5% on improvement from most segments; (i) office segment (+1%), (ii) retail segment (+6%) on higher rental rate and possibly aided by advertisement revenue and higher turnover rent during the 4Q18 holiday season, (iii) management services segment (+15%) on new contracts, while the hotel segment remained flat. PBT margin declined slightly by 0.8ppt mostly from higher operating expenses (+10%) due to similar reasons mentioned above, but aided by higher associate stake (+12%). All in, RDI was up by 8% excluding RM21.7m in deferred taxes as we deem it as a paper gain arising from RPGT assumptions of future sale.

Outlook. The Group had previously renewed its shareholders’ approval for a 10% placement in Apr 2018, which is valid for one year. 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 portions and will likely be completed in FY21-22. Lot 185 and Lot M are still under development and unlikely to be injected during the greenfield phase, while completion of construction is in 2022.

Maintain FY19E CNPs of RM732m and introduce FY20E CNP of 741m, with growth driven by single-digit rental step-ups, and improvement of occupancy to 65% (55% currently) for Mandarin Oriental. FY19-20E NDPS of 36.0-36.5 sen implies 4.6-4.6% 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%. Our applied spread is the thinnest among MREITs under our coverage (+1.4ppt to 3.3ppt) given KLCC’s high- quality asset profile, which provides strong earnings stability, while we like the fact that KLCC is one of the few Shariah-compliant MREITs. Even so, we maintain our UNDERPERFORM call as we believe valuations are exhausted at current levels, while net yield of 4.6% in FY19E is below large cap MREIT peers’ average of 5.3%.

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

Source: Kenanga Research - 25 Jan 2019