FY19 RDI of RM730m came in well within our and consensus estimates, at 100% each. FY19 NDPS of 35.5 sen is also within our estimate (at 97%). Maintain FY20E RDI of RM741m and introduce FY21E RDI of RM753m driven by organic growth on single-digit reversions and stable occupancy. Maintain MP and TP of RM8.25 (implied FY20E net yield of 4.4%).

FY19 realised distributable income (RDI) of RM730m is well within our and consensus estimates, at 100% each. 4QFY19 GDPS of 10.98 sen (5.35 sen single-tier dividend plus 6.25 sen subject to 10% withholding tax), accumulates to FY19 NDPS of 35.5 sen, meeting our FY19E NDPS of 36.0 sen (implying 4.5% net yield).

Results’ highlight. YoY, top-line was up by 1% on all segments: (i) driven by the retail segment (+2%) on improved rental and advertising incomes, and (ii) better revenue from the hotel segment (+3%) on better occupancy and improvements in the F&B segment, while the office and management services segment remained flat. This coupled with mildly lower effective tax rate of 13.2% (vs. 13.3%) allowed RDI to increase by 5%. QoQ, top-line was up by 3% from growth in the retail (+5%) and hotel (+11%) segments due to similar reasons mentioned above while the office and management services segment remained flat. All in, bottom-line increased by 3%.

Outlook. Shareholders’ approval for a 10% placement is valid until April 2020. Phase 3 of Menara Dayabumi is expected to comprise a 60- storey tower of mixed development, consisting of retail, office and hotel spaces. Phase 3 is still in the tendering process as management focuses on securing an anchor tenant before proceeding with the development.

Earnings unchanged. We maintain FY20E RDI of RM741m and introduce FY21E RDI of RM753m with forward earnings to be driven by organic growth from single-digit rental step-ups, and improved occupancy for Mandarin Oriental. FY20-21E NDPS of 36.5-37.0 sen imply 4.6-4.6% 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% (at +1.3ppt yield spread to our 10-year MGS target of 3.40%). Our applied spread is the lowest among MREITs under our coverage (+1.3ppt to +3.2ppt) as we favour KLCC’s premium asset quality profile, and triple-net-lease (TNL) structure which provide for strong earnings stability, and as it is one of the few Shariah-compliant MREITs. Our MARKET PERFORM call (with potential total return of 8%) is premised on limited potential upsides as its estimated net yield of 4.6% is at the lower end of large cap MREIT peers’ average of 4.8%.

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 - 24 Jan 2020