9MFY21 RDI of RM440m came above our expectation (at 81%) as we had expected a much weaker 3QFY21 due to MCO impact on the retail and hotel segments, but is within consensus at 73%. 9MFY21 NDPS of 19.18 sen (at 71.5%) is also in line as the payout in 4Q is generally lumpier. Increase FY21E earnings by 8% on lower-than-expected rental rebates while FY22E earnings of RM657m remains unchanged. Maintain OUTPERFORM and TP of RM7.35 on FY22E GDPS/NDPS on +1.1ppt yield spread to the 10-year MGS.

9MFY21 realised distributable income (RDI) of RM440m came in slightly above our expectation (at 81%) but within consensus at 73%. The deviation from our estimate was because we had anticipated a weaker 3QFY21 due to rental rebates and weakness from the hospitality segment, but the results were better than expected on less rental holidays. 3QFY21 NDPS of 6.38 sen (0.84 sen single-tier dividend plus 5.54 sen subject to 10% withholding tax) brought 9MFY21 NDPS to 19.18 sen, within our FY21E NDPS of 26.8 sen (at 71.5%) as its dividend payments tend to be lumpier in 4Q.

Results’ highlight. QoQ, top-line was down by 7% mainly affected by weakness from the retail (-20%) and hospitality (-31%) segments due to MCO during most of 3QFY21. All in, RDI was down by 6%, while net gearing remained stable at 0.18x. YoY-Ytd, top-line was down by 12% due mainly to the retail (-23%), hotel (-46%) and management services (-5%) segments on closure of most business operations during this period and lower car park income. Lower operating cost (-8%) and lower financing cost (-5%) partially negated the impact on bottom-line which only declined by 7%.

Outlook. The group’s main driver, the office segment, remains extremely stable on long-term leases of >15 years. Retail and hospitality segments have been challenging in 9MFY21 but 4QFY21 is expected to see a turnaround in line with the reopening of the economy and year-end festivities and holidays. The Group are 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 positive reversions going forward. 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.

Increase FY21E earnings by 8% to RM589m (from RM545m), but FY22E CNP of RM657m remains unchanged. We increase FY21E earnings on better-than-expected revenue contribution from the retail segment on less rental rebates in light of its resilience seen in 3QFY21, while the hospitality segment’s occupancy is expected to remain at c.20% for FY21. Growth for FY22 is driven by less YoY rental holidays for retail tenants and better occupancy for the hospitality segment at c.40%. FY21- 22E NDPS of 29.0-32.4 sen imply 4.3-4.8% net yield.

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 +0.5SD) as we expect to see sector improvements in 4QFY21 onwards and a gradual return to normalcy in FY22 as shopper footfall improves. We like KLCC for its premium asset quality, stable office segment, triple-net-lease (TNL) structure and Shariah-compliant status while earnings improvements in coming months from retail are also expected.

Source: Kenanga Research - 9 Nov 2021