1HFY22 net profit of RM326.6m (+13% YoY) accounted for 47%/49% of our/consensus estimates – broadly in-line. 1HFY22 DPS of 16.0 sen is also within our full-year expectation of 32.4 sen. Following the results, we have tweaked our forward earnings by -3% for FY22 and +1% for FY23. Still MARKET PERFORM with a revised higher TP of RM6.60 based on a target yield of 5.5% (which implies a 1.0% yield spread above our 10-year MGS assumption of 4.5%). There is no adjustment to our TP based on ESG of which it is given a 3-star rating as appraised by us.

Results’ highlights. YoY, on the back of a 19% increase in revenue, pretax profit was up 21% for the first half. Cumulative net profit saw a slightly lower growth of 13% due to marginally higher effective tax rate (of 12.5% versus 9.6% previously). In terms of pretax profit growth breakdown for 1HFY22, the retail division posted a 52% jump while the office segment was flat at +1%. Meanwhile, the hotel operation narrowed its pretax loss from RM12.9m in 1QFY22 to RM8.3m in 2QFY22, taking the first half pretax loss to RM21.1m (versus RM34.3m previously).

Outlook. The company indicated that tenant sales (up 127% YoY in 2QFY22) has surpassed the pre-Covid levels (at 116%), although footfall (+198% YoY in 2QFY22) is still approximately 30% below the pre-Covid threshold. This suggests that the performance of its retail business (with its occupancy standing at 92% in 1HFY22 versus 1HFY21’s 94%) remains on a recovery track, notwithstanding the possible disruptions arising from the ongoing concerns of rising inflationary environment and recession fears. As for the office segment (which is backed by long-term, locked-in leases with high quality tenants and enjoying occupancy rate of 100%), its contribution is expected to stay stable. And on account of higher occupancy rate (which will likely climb further from 32% in 1HFY22 versus 14% in 1HFY21), the hotel operation will strive to break even in 4QFY22.

Tweaking our forecasts. Following the 1HFY22 results, we have adjusted our net profit forecasts to RM678m (-3%) for FY22 and RM726m (+1%) for FY23 after tweaking our assumptions. Correspondingly, our FY22E and FY23 DPS are revised to 33.1 sen (from 32.4 sen) and 36.3 sen (from 33.3 sen), respectively, which imply yields of 4.8%-5.2%.

Still MARKET PERFORM. We have revised our TP to RM6.60 (from RM6.45) based on a target yield of 5.5% (which is derived from a 1.0% yield spread above our 10-year MGS assumption of 4.5%) on FY23E DPS. This is to reflect KLCCSS’ prime asset portfolio (as anchored by its office towers in the KLCC area and Suria KLCC mall).

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

Source: Kenanga Research - 10 Aug 2022