9MFY22 net profit of RM503.2m (+18% YoY) met expectations at 74%/74% of our/consensus projections. 9MFY22 DPS of 24.0 sen remains on track to reach our full-year estimate of 33.1 sen. The stronger earnings momentum was lifted by higher contribution from the retail segment and narrower losses from the hotel operations. With no change to our earnings forecasts, we are keeping our MARKET PERFORM call with a 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%).

Results’ highlights. YoY, pretax profit rose 31% to RM659.3m in tandem with a 27% increase in revenue to RM1,046.0m in 9MFY22. YTD net profit was up 18% to RM503.2m, partially negated by a marginally higher effective tax rate (of 12.8% versus 9.1% previously). In terms of pretax profit breakdown, the office segment contributed the most (flattish at RM353.8m or 54% of overall pretax profit) while the retail division saw an 83% jump to RM283.1m (accounting for 43% of total). Meanwhile, the hotel operation narrowed its pretax loss from RM12.9m in 1QFY22 to RM8.3m in 2QFY22 and to RM2.4m in 3QFY22, taking YTD pretax loss to RM23.5m (versus RM54.4m in 9MFY21).

Outlook. Overall profitability remains on a recovery track as retail tenant sales for the 9-month period has already surpassed the pre-Covid levels (at 106%) although footfall is still at around 65% of the pre-Covid threshold. In addition, occupancy rates are expected to remain steady for office (at 100% end-September 2022, given its long-term, locked-in leases with high quality tenants) and retail (at 92% end-September 2022, backed by sustained recovery in tenant sales and footfall) as the hotel operation (which saw its occupancy rate soaring from 7.4% in 3QFY21 to 55.3% in 3QFY22, taking YTD occupancy rate to 40%) strives to turn around in 4QFY22.

No change to forecasts. Against a backdrop of year-end consumer spending that may be tempered by weaker purchasing power amid the elevated inflationary environment and uncertain economic outlook, we are anticipating a broadly flattish QoQ final quarter performance. Hence, our net profit forecasts stay at RM678m for FY22 and RM726m for FY23 while DPS remain unchanged at 33.1 sen this year and 36.3 sen next year, translating to yields of 4.9% and 5.3%, respectively.

Still MARKET PERFORM. Our TP is unchanged at RM6.60 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 FY23F DPS. This is to reflect KLCCSS’ prime asset portfolio (as anchored by its office towers in the KLCC area and Suria KLCC mall). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

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

Source: Kenanga Research - 11 Nov 2022