1HFY21 RDI of RM300m came in within our and consensus estimates, at 55% and 46% of full-year estimates, respectively, while 1HFY21 NDPS of 12.80 sen is also within (at 47%). Maintain FY21-22E CNP of RM545-657m as we have already accounted for expected weakness in 3QFY21 due to the pandemic, but anticipate recovery by FY22 driven by the return of retail activity and bolstered by its extremely stable office segment. Maintain OUTPERFORM and TP of RM7.35 on FY22E GDPS/NDPS pegged to an unchanged +1.1ppt yield spread to the 10-year MGS.

1HFY21 realised distributable income (RDI) of RM300m came in within our and consensus estimates, at 55% and 46%, respectively. 2QFY21 NDPS of 6.40 sen (0.99 sen single-tier dividend plus 6.01 sen subject to 10% withholding tax) brought 1HFY21 NDPS to 12.8 sen which is also within our FY21E NDPS of 29.3 sen (at 47%).

Results’ highlight. QoQ, top-line was down marginally by 1% due to marginal weakness from the retail (-5%) and hospitality (-6%) segments due to MCO. All in, RDI was down by 2%. YoY-Ytd, top-line was down by 10% due to weakness from the retail (-16%), hotel (-44%) and management services (-4%) segments due to the MCO since 7th May 2021 and lower car park income. Lower operating cost (-7%) and lower financing cost (-5%) lifted the strain on bottom-line which only declined by 5%.

Outlook. KLCC’s main revenue driver, the office segment, remains extremely stable on long-term leases of >15 years. Retail and hospitality are expected to remain challenging in the near term given the worsening impact of the pandemic with rental assistance still on the table. As such, we brace for a weaker 3QFY21. On the bright side, the group is actively securing most of the tenants for the retail space (Suria KLCC will see c.30% of leases up for expiry in FY21) and we are expecting flattish to mildly negative reversions. Meanwhile its 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 RM545-657m. We expect 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’s occupancy is expected to remain at c.20% in FY21 due to the Covid-19 pandemic. FY21-22E NDPS of 26.8-32.4 sen imply 4.0-4.9% net yields.

Maintain OUTPERFORM and TP of RM7.35 on FY22E GDPS/NDPS of 34.6 sen/32.4 sen on an unchanged +1.1ppt yield spread to our 10-year MGS target of 3.60%. Our applied spread is within the range among MREITs under our coverage (of average to +1.0SD) as we expect to see sector improvements in in 4QFY21 onwards and FY22 upon effective roll- out of the national vaccination program and assuming looser MCO restrictions and higher shopper footfall by then. We favour KLCC for its premium asset quality, primarily its 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-than-expected occupancy rates.

Source: Kenanga Research - 18 Aug 2021