1Q19 RDI of RM183m came in within our and consensus estimates at 25% each. 1Q19 NDPS of 8.17 sen is also within (23%). Maintain FY19-20E CNP of RM732-741m, with growth driven by organic growth on single-digit reversions and stable occupancy. Maintain MP on an unchanged TP of RM7.35 as KLCC’s net yield of 4.6% remains below large- cap MREITs’ average net yield of 5.2%.

1Q19 realised distributable income (RDI) of RM183m is within our and consensus estimates at 25%, each. 1Q19 GDPS of 8.80 sen (2.52 sen single-tier dividend plus 6.28 sen subject to 10% withholding tax), translates to NDPS of 8.17 sen, within our expectation at 23% of FY19E NDPS of 36.0 sen (implying 4.6% net yield).

Results highlight. YoY, top-line was up by 2% on improvements from: (i) retail segment (+5%) on higher rent and steady occupancy, and (ii) management services segment (+5%) on new contracts, despite slight decline from the hotel segment (-3%) and a flattish office segment (0%). This coupled with higher interest income (+11%) which allowed RDI to increase by 7%. QoQ, top-line was down by 4% on marginal declines from all segments such as; (i) office segment was mostly flattish (-1%), (ii) retail segment declining marginally (-2%) likely on lower turnover rent as 4Q is generally a stronger quarter, (iii) hotel segment (-7%) due to the seasonality effect, and (iv) management services segment (- 12%) likely due to 4Q18 seeing more contracts due to year-end period. All in, RDI was only down by 1% thanks to lower operating cost (-11%), likely due to lower maintenance cost from management services segment.

Outlook. The Group had previously renewed its shareholders’ approval for a 10% placement in Apr 2019, 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 spaces 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 FY19-20E CNPs of RM732-741m. Foreseeable growth going forward is solely organic, driven by single-digit rental step-ups, and improvement of occupancy for Mandarin Oriental. FY19-20E NDPS of 36.0-36.5 sen implies 4.6-4.6% yields.

Maintain MARKET PERFORM and TP of RM7.35 based on an unchanged target gross/net yield of 5.2%/4.9% and unchanged FY19E GDPS/NDPS of 38.5 sen /36.0 sen on a +1.3ppt to our 10-year MGS target of 3.90%. Our applied spread is the lowest among MREITs under our coverage (+1.3ppt to 3.3ppt) given KLCC’s high-quality asset profile, which provides strong earnings stability, and the fact that KLCC is one of the few Shariah compliant MREITs. We are comfortable with our MARKET PERFORM call on limited upsides going forward as estimated net yield of 4.6% in FY19 is already on the lower end of large cap MREIT peers’ average of 5.2%. Risks to our call include: (i) bond yield compression/expansion, (ii) higher-or-lower-than-expected rental reversions, and (iii) stronger-or- weaker-than-expected occupancy rates.

Source: Kenanga Research - 8 May 2019