9MFY19 RDI of RM544m came in well within our and consensus estimates, at 74% each. 9MFY19 NDPS of 24.5 sen is broadly within our estimate (at 68%) on traditionally stronger payout in 4Q. Maintain FY19-20E CNP of RM732- 741m with earnings driven by organic growth on single-digit rental reversions and stable occupancy. Maintain MP and TP of RM8.25 (implied FY20 net yield of 4.4%).

9MFY19 realised distributable income (RDI) of RM544m is well within our and consensus estimates, at 74% each. 3Q19 GDPS of 8.80 sen (2.56 sen single-tier dividend plus 6.24 sen subject to 10% withholding tax), translates to 9MFY19 NDPS of 24.5 sen, coming in broadly within our FY19E NDPS of 36.0 sen at 68% (implying 4.5% net yield) as 4Q payout is historically higher.

Results highlight. YoY, top-line was up by 1.8% on all segments: (i) improvements from the retail segment (+3.2%) on improved rental and advertising income, (ii) better revenue from the hotel segment (+1.4%) on better occupancy and despite a decrease in the F&B segment (-3%), (iii) stable office segment (+0.3%), and (iv) better management services segment (+2.1%). This coupled with higher interest income (+10%) allowed RDI to increase by 6%. QoQ, top-line was flattish at 1% on the back of contributions from the hotel (+5%) and management services segment (+7%) due to similar reasons mentioned above, but partially weighed down by the flattish office segment (0%) and despite slight decline in the retail segment (-2%) due to tenant reconfiguration. This trickled straight to bottom-line which also increased by 1% despite a decrease in associate contributions, which was offset by lower tax rate (-5%).

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 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. Phase 3 is still in the tendering process as management focuses on securing an anchor tenant before proceeding with the development. Lot 185 and Lot M are still under development and unlikely to be injected during the greenfield phase, with completion of construction scheduled in 2022.

Earnings unchanged. We maintain FY19-20E CNP of RM732-741m with forward earnings to be driven by organic growth from single-digit rental step-ups, and higher occupancy for Mandarin Oriental. FY19-20E NDPS of 36.0-36.5 sen implies 4-5-4.6% net yields.

Maintain MARKET PERFORM and TP of RM8.25 on FY20E GDPS/NDPS of 39.0 sen/36.5 sen and an unchanged target gross/net yield of 4.7%/4.4% which represents a +1.3ppt yield spread to our 10- year MGS target of 3.40%. The applied spread is the lowest among MREITs under our coverage (+1.3ppt to +3.2ppt) given KLCC’s premium asset quality profile for providing strong earnings stability, and as it is one of the few Shariah-compliant MREITs. We are keeping our MARKET PERFORM call due to limited potential upsides as its 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 - 12 Nov 2019