FY20 RDI of RM550m came in below our and consensus estimates, at 91% and 87%, while FY20 NDPS of 27.65 sen is below (at 93%) on weaker-than-expected retail and hospitality segments and lower contributions from KLCCP. Lower FY21E CNP by 11% on weaker retail and hospitality segments and higher cost anticipated for prolonged property development projects. Downgrade to MP on a lower TP of RM7.30 (from RM8.20) on a 1.2ppt spread to the 10-year MGS.

FY20 realised distributable income (RDI) of RM550m came in below our and consensus estimates, at 91% and 87%, respectively. The deviation was due to a weaker-than-expected top-line of 94% on a weak retail and hospitality segment, and was further dragged down by lower- than-expected RDI contribution from KLCCP (-73% YoY) due to an impairment of RM81.5m for Dayabumi Phase 3 as a result of anticipated increase in development cost. 4QFY20 NDPS of 6.13 sen (1.0 sen single- tier dividend plus 5.13 sen subject to 10% withholding tax) brings FY20 dividends to 27.65 sen, deemed below our FY20E NDPS of 29.8 sen (93%) in tandem with the weaker earnings.

Results’ highlight. YoY-Ytd, top-line was down by 13% due to weak contributions from the retail (-20%) and hospitality segment (-70%) as both segments were severely affected by the MCO. The office segment was fairly flattish (-1%) while management services segment was up by 22% due to the group’s new business approach. All in, RDI was down by 24% given the lower distributable income from KLCCP (-63% YoY) due to the impairment. QoQ, top-line was down by 3% due to hotel (-17%), and retail (-7%), but was lifted slightly by contributions from the management services segment (+13%). All in, RDI was down by 49% to RM79.2m as impairment cost of RM81.5m dragged KLCCP’s contribution into the red to RM34.1m loss (from RM44.2m in 3QFY20) while KLCC REIT’s contribution of RM113.3m remained flattish (from RM111.5m in 3QFY20).

Lower FY21E CNP by 11% to RM596m (from RM669m) as we anticipate weaker contributions in the near term from the retail segment (flattish to low single-digit negative reversions) for the leases up for expiry and rental rebates in coming months, and weaker occupancy for the hospitality segment (to 25% from 45%) given the re-emergence of high concentration of Covid-19 cases in the Klang Valley as well additional cost incurred due to the prolongation of property development projects. FY21-22E NDPS of 29.3-32.4 sen (from 33.0 sen) imply 4.2-4.6% net yield.

Downgrade to MARKET PERFORM (from OP) on a lower TP of RM7.30 (from RM8.20) post lowering our FY21E GDPS/NDPS to 31.3 sen/29.3 sen (from 35.2 sen/33.0 sen) on a +1.2ppt yield spread (@+1.0SD) to our 10-year MGS target of 3.10%. Our applied spread is within the range among MREITs under our coverage (of +0.5 to +1.5SD) given uncertainties arising from the Covid-19 pandemic but we take comfort in KLCC’s 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 and Shariah-compliant status.

Risks to our call include: (i) bond yield expansion, (ii) lower-than- expected rental reversions, and (iii) stronger-than-expected occupancy rates.

Source: Kenanga Research - 29 Jan 2021