1QFY20 RDI of RM176m came in well within our and consensus estimates, at 26% and 24%, respectively. 1QFY20 NDPS of 7.71 sen is also within our estimate (at 23%). Maintain FY20-21E RDI of RM673-734m, driven by organic growth on flattish to low single-digit reversions. Maintain MP but on a higher TP of RM8.10 (from RM7.45) and an implied FY20E net yield of 4.1%.

1QFY20 realised distributable income (RDI) of RM176m is well within our and consensus estimates, at 26% and 24%, respectively. 1QFY20 NDPS of 7.71 sen (3.28 sen single-tier dividend plus 5.84 sen subject to 10% withholding tax), also met our FY20E NDPS of 33.2 sen (at 23%) implying 4.2% net yield.

Results’ highlight. YoY, top-line was flat as: (i) office segment saw no changes, (ii) retail segment was slightly better (+3%) on improved occupancy, and (iii) management services segment improved (+24%), but heavily negated by decline in the hotel segment (-34%). All in, RDI was down by 4% on higher operating cost (+9%) and higher interest expense (+3%). QoQ, top-line was down by 3% due to weakness in the hospitality segment (-46%) while other segments were positive such as office (+1%) and retail (+2%), and the management services segment (+16%). All in, RDI was down by 6% on the back of lower interest income (-24%) and lower associate contribution (-23%).

Outlook. 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.

Maintain FY20-21E CNP of RM673-734m with forward earnings to be driven by organic growth and flattish to low single-digit rental step-ups. We make no further changes to earnings in spite of the MCO for now as we had previously lowered earnings by 9-2% in FY20-21E due to potential loss of income from the retail and hospitality segments, while the office segment remains stable for now. FY20-21E NDPS of 33.2- 36.2 sen imply 4.2-4.6% net yields.

Maintain MARKET PERFORM but on a higher TP of RM8.10 (from RM7.45) post lowering our 10-year MGS target to 3.30% (from 3.70%), but our FY21E GDPS/NDPS of 38.6 sen/36.2 sen and yield spread of (+1.5ppt (@+1.5SD) remain unchanged. Our applied spread is within range among MREITs under our coverage (of +1.0 to +2SD) given uncertainties arising from the Covid-19 pandemic. We favour KLCC’s premium asset quality profile, and triple-net-lease (TNL) structure, and believe it will continue to be a favorite among institutional investors as it is one of the few Shariah-compliant MREITs.

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 - 6 May 2020