1QFY22 RDI of RM176m came within our expectation at 27% and consensus at 26% while NDPS of 7.30 sen (at 23%) is also within. Maintain FY22-23E earnings of RM657-676m on single- digit reversions on expectations of better earnings in the near term given the reopening of the economy and it is also stably backed by resilient office assets. Downgrade to MARKET PERFORM (from OP) on a slightly lower TP of RM6.55 (from RM6.90) post rolling forward valuation base to FY23E but on a higher 10-year MGS target of 4.40% (from 3.90%).

1QFY22 realised distributable income (RDI) of RM176m came in within our expectation at 27% and consensus at 26%. 1QFY22 NDPS of 7.30 sen (0.99 sen single-tier dividend plus 7.01 sen subject to 10% withholding tax) is also within at 23% of our FY22E NDPS of 32.4 sen.

Results’ highlight. YoY, top-line was up by 14% in line with the reopening of the economy and better contributions from all segments. Retail (+22%), hotel (+119%) and management services (+22%) jumped while the main driver office segment saw gradual improvements of 0.2%. All in, RDI was up by 16%. QoQ, top-line was down by 8% on weaker contributions from retail (-8%), hospitality (-13%) and management services (-21%) in line with seasonality factors. As a result, RDI declined by 11% on slightly lower RDI margin of 55% (vs. 57%). Gearing remains low at 0.11x.

Outlook. The office segment which is KLCC’s main earnings driver remains stable backed by long-term lease tenures of 18-30 years. The retail and hospitality segments are expected to see a comeback in coming quarters with the reopening of the economy as well as international borders. However, we remain cautious on the sector on concerns of other potentially disrupting viruses. For now, with the rise in shopper traffic and increased tenants’ revenues, we are expecting flattish to mildly positive reversions going forward.

Maintain FY22-23E CNP of RM657-676m. Improvement in FY22E earnings will mostly be on better revenue contribution from the retail segment on less rental rebates. Additionally, the hospitality segment’s occupancy is expected to improve to 45% in FY22 and 60% in FY23 (from 16% in FY21). FY22-23E NDPS of 32.4-33.3 sen imply 4.8-4.9% net yield.

Downgrade to MARKET PERFORM (from OP) on a slightly lower TP of RM6.55 (from RM6.90). Our TP and call are downgraded post rolling forward valuation to FY23E GDPS/NDPS of 35.5 sen/33.3 sen and +1.0ppt yield spread but on a higher 10-year MGS target of 4.40% (from 3.90%). Our applied spread is on the lower end of MREITs under our coverage at +1.0ppt (+0.8ppt to +4.5ppt) as KLCC is backed by stable office segment, triple-net-lease (TNL) structure and Shariah-compliant status while the reopening of the economy also suggest improving earnings in the near term for the retail and hospitality segments.

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

Source: Kenanga Research - 25 May 2022