1H19 RDI of RM363m came in within our and consensus estimates, at 50% and 49% respectively. 1H19 NDPS of 16.3 sen is also within our estimate (at 45%). Maintain FY19-20E CNP of RM732-741m, as earnings will be driven by organic growth on single-digit reversions and stable occupancy. Maintain MP but increase TP to RM7.75 (from RM7.65) post rolling forward valuation base to FY20.

1H19 realised distributable income (RDI) of RM363m is within our and consensus estimates, at 50% and 49% respectively. 2Q19 GDPS of 8.80 sen (2.57 sen single-tier dividend plus 6.23 sen subject to 10% withholding tax), translates to 1H19 NDPS of 16.3 sen, coming in within our FY19E NDPS of 36.0 sen (implying 4.6% net yield).

Results highlight. YoY-Ytd, top-line was up by 2% on: (i) improvements from the retail segment (+4%) on improved rental and stable occupancy, (ii) better revenue from the hotel segment (+4%) on slightly improved occupancy and contributions from the F&B segment, (iii) a flattish office segment (0%), and despite (iv) a marginal decline in the management services segment (-1%). This coupled with higher interest income (+9%) allowed RDI to increase by 6%. QoQ, top-line was down marginally by 1% on marginal declines from the retail (-2%) and hotel (1%) segments likely due to tenant movements from reconfiguration efforts, and as 2Q is seasonally a weaker quarter, while the office and management services segment remained flat. This on the back of slightly higher operating cost (+4%) from almost all segments this quarter for marketing and promotional expenses, and higher interest expense (+2%), resulted in RDI declining slightly by 2%.

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 a 60-storey tower of mixed development, consisting of 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 CNP of RM732-741m driven by organic growth from 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% yield.

Maintain MARKET PERFORM but increase TP to RM7.75 (from RM7.65) post rolling forward our valuations to FY20E GDPS/NDPS of 39.0 sen /36.5 sen (from 38.5 sen /36.0 sen) on an unchanged target gross/net yield of 5.0%/4.6% which is a +1.3ppt to our 10-year MGS target of 3.70%. The applied spread is the lowest among MREITs under our coverage (+1.3ppt to +3.3ppt) which is a reflection of KLCC’s premium asset quality profile providing strong earnings stability, and the fact that KLCC is one of the few Shariah-compliant MREITs. We are comfortable with our MARKET PERFORM call due to limited upsides going forward as estimated net yield of 4.6% is at the lower end of large cap MREIT peers’ average of 4.9%.

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 - 21 Aug 2019