1HFY20 RDI of RM315m came in within our and consensus estimates, at 47% and 46%, respectively. 1HFY20 NDPS of 14.61 sen is also broadly within our estimate (at 44%). We maintain FY20E CNP of RM673m, but lower FY21E marginally by 5% on anticipated weakness from the hospitality segment given the Covid-19 pandemic. However, we expect the main earnings driver office segment to remain stable and retail to improve in coming quarters. Upgrade to OP (from MP) on a higher TP of RM8.55 (from RM8.10), with an implied FY21E net yield of 4.0%.

1HFY20 realised distributable income (RDI) of RM315m is within our and consensus estimates, at 47% and 46%, respectively. 2QFY20 NDPS of 6.89 sen (1.88 sen single-tier dividend plus 6.09 sen subject to 10% withholding tax) brings 1HFY20 dividends to 14.61 sen which is deemed broadly within our FY20E NDPS of 33.2 sen (44%) as we expect larger pay-out in 4Q, implying 4.3% net yield.

Results’ highlight. YoY-Ytd, top-line was down by 12% due to the retail (-19%) and hospitality (-63%) segments as rental assistance was given for retail and hospitality tenants facing steep decline in business during the MCO, while the office segment was stable. Management services segment was up by 19% due to additional facility management services. All in, RDI was down by 13% despite marginally lower operating cost (-4%). QoQ, top-line was down by 25% mainly due to weakness from the retail (-44%), hospitality (-88%), and management services (-8%) segments but the office segment remained fairly stable. This resulted in RDI declining by 21%.

Outlook. Going forward, we believe the hotel segment will continue to be challenging given the impact of the pandemic. We expect the retail segment to improve in coming quarters for now barring any unforeseen circumstances, while the office segment remains the most formidable segment within the portfolio. 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 FY20E CNP of RM673m, and lower FY21E CNP by 5% to RM699m (from RM734m) as we pre-empt weak contributions from the hotel segment in FY21 on lower occupancy. Our retail and office segment forward earnings will continue to be driven by organic growth on flattish to low single-digit rental step-ups. FY20-21E NDPS of 33.2- 34.4 sen (from 33.2-36.2 sen) imply 4.3-4.4% net yield.

Upgrade to OUTPERFORM (from MP) with a higher TP of RM8.55 (from RM8.10) post lowering our 10-year MGS target to 2.80% (from 3.30%), closer to current levels, despite a slightly lower FY21E GDPS/NDPS of 36.8 sen/34.4 sen with unchanged yield spread (+1.5ppt (@+1.5SD). Our applied spread is within the range among MREITs under our coverage (of +1.0 to +2SD) given uncertainties arising from the Covid-19 pandemic. We are comfortable with our OP call as we anticipate better quarters ahead for KLCC and believe most foreseeable downsides have been accounted for. We favour KLCC for its premium asset quality, stable office segment and triple-net-lease (TNL) structure. We believe it will continue to be a favourite among institutional investors as it is one of the few Shariah-compliant MREITs.

Source: Kenanga Research - 6 Aug 2020