1QFY21 RDI of RM151m came in within our and consensus estimates, at 25% and 23% of full-year estimates, respectively, while NDPS of 6.40 sen is also within (at 22%). Maintain FY21- 22E CNP of RM596-657m anticipating near-term weakness for the retail and hospitality segments, but earnings remain bolstered by the Group’s stable office segment. Maintain OUTPERFORM on a higher TP of RM8.15 as we roll the valuation base forward to FY22E on an unchanged +0.9ppt spread to the 10-year MGS.

1QFY21 realised distributable income (RDI) of RM151m came in within our and consensus estimates, at 25% and 23%, respectively. 1QFY21 NDPS of 6.40 sen (0.99 sen single-tier dividend plus 6.01 sen subject to 10% withholding tax) is also within our FY21E NDPS of 29.3 sen (at 22%).

Results’ highlight. QoQ, top-line was down by 7% due to hotel (-6%), retail (-8%) and management services (-22%) segments which were affected by the MCO 2.0, while the office segment remained stable at +2%. All in, RDI was up by 91% with the absence of the RM81.5m impairment cost which dragged down the Group’s contribution last quarter. YoY, top- line was down by 20% due to weak contributions from the retail segment (- 32%), hospitality segment (-68%) and management services segment (- 10%) due to similar reasons mentioned above, while the office segment was down marginally (-3%) due to accounting adjustments. All in, RDI was down by 14% on lower cost (-18%) and financing cost (-5%).

Outlook. KLCC remains bolstered by the extremely stable office segment which makes up 50% of top-line, on long-term leases of >15 years. Given the resurgence of Covid-19 cases recently, we expect the retail segment to see some potential rental rebates in 2QFY21 while the hospitality segment is expected to remain challenging. Suria KLCC will see c.30% of leases up for expiry this year and we are expecting flattish to mildly negative reversions for now. Meanwhile the office assets have locked in long-term leases with the recent extension of the Triple Net Lease (TNL) agreements for PETRONAS Twin Towers and Menara 3 PETRONAS for a further 15 years to 2042, reinforcing its revenue stability, with Menara ExxonMobil securing lease renewal for the next three years of its 18-year lease tenure. As for KLCCP, 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.

Maintain FY21-22E CNP of RM596-657m as we anticipate (flattish to low single-digit negative reversions in the retail segment for leases up for expiry and rental rebates in coming months, while the hospitality segment occupancy is expected to be 25% dampened by the Covid-19 pandemic in the Klang Valley. FY21-22E NDPS of 29.3-32.4 sen imply 4.3-4.7% net yield.

Maintain OUTPERFORM with a higher TP of RM8.15 (from RM7.55) post rolling forward valuation base to FY22E GDPS/NDPS of 34.6 sen/32.4 sen on an unchanged +0.9ppt yield spread to our 10-year MGS target of 3.30%. Our applied spread is within the range among MREITs under our coverage (of average to +0.5SD) as we expect to see sector improvements in 2HFY21 onwards and FY22 on looser MCO restrictions and effective roll-out of the national vaccination program by then. We favour KLCC for its premium asset quality, and take comfort in KLCC’s stable office segment, triple-net-lease (TNL) structure and Shariah- compliant status which make it a favourite amongst institutional investors.

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

Source: Kenanga Research - 5 May 2021