9MFY20 RDI of RM471m came in within our and consensus estimates, at 70% and 71%, but 9MFY20 NDPS of 21.52 sen was below (at 65%) as we had expected a larger payout for 2H. Lower FY20-21E CNP by 10-4% on weaker retail and hospitality segments in the near term given resurgence of the Covid-19 pandemic. Maintain OP but on a lower TP of RM8.20 (from RM8.55) post accounting for most foreseeable downsides and given the stability of its office segment.

9MFY20 realised distributable income (RDI) of RM471m came in within our and consensus estimates, at 70% and 71%, respectively. 3QFY20 NDPS of 6.91 sen (2.17 sen single-tier dividend plus 5.87 sen subject to 10% withholding tax) brings 9MFY20 dividends to 21.52 sen, deemed below our FY20E NDPS of 33.2 sen (65%) as we had expected a larger pay-out for 2H.

Results’ highlight. YoY-Ytd, top-line was down by 12% due to the retail (- 18%) and hospitality (-66%) segments as rental assistance was given for retail and hospitality tenants that were affected by the pandemic, but the office segment remained stable. Management services segment was up by 18% on additional facility management services. As a result, RDI was down by 13% despite marginally lower operating cost (-3%). QoQ, top-line rebounded up 17% from improvements in retail (+42%), hospitality (+237%) and management services, while the office segment was stable. All in, RDI was up by 12%.

Outlook. Given the resurgence of Covid-19 cases recently, we expect the retail and hospitality segments to continue to face headwinds in the near term. So far the Group has renewed 70% of its c.30% of leases up for renewal in FY20. The office segment which is the backbone of the portfolio remains stable due to its long-term lease profile. Phase 3 of its Menara Dayabumi development (likely to comprise a 60-storey tower of mixed development consisting of retail, office and hotel spaces) is still in the tendering process as management focuses on securing an anchor tenant before proceeding with the development.

Lower FY20-21E CNP by 10-4% to RM605-669m as we anticipate weaker contributions in the near term from the retail and hospitality segment given the re-emergence of high concentration of Covid-19 cases in the Klang Valley. We expect additional rental assistance and weaker reversions (flattish from low single-digit) for the remaining leases up for expiry in FY20-21, as well as lower hotel occupancy of 20% (vs. 35%) in FY20 and 45% (vs. 55%) in FY21. FY20-21E NDPS of 29.8-33.0 sen (from 33.2-34.4 sen) imply 3.9-4.3% net yield.

Maintain OUTPERFORM but on a lower TP of RM8.20 (from RM8.55) post lowering our FY21E GDPS/NDPS of 35.2 sen/33.0 sen (from 36.8 sen/34.4 sen) with unchanged yield spread (+1.5ppt (@+1.5SD) and 10- year MGS target of 2.80%). 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 but we take comfort in KLCC’ stable office segment while we believe we have also accounted for most foreseeable downsides. 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 - 11 Nov 2020