FY22 core net profit of RM690.8m (+13% YoY) came within expectations – 2% above our forecast and 1% below consensus. The better earnings performance was boosted by higher contribution from the retail segment and narrower losses from the hotel operation. We maintain our MARKET PERFORM call with 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, after stripping out fair value adjustments to investment properties amounting to RM128.7m (versus minus RM144.5m in FY21), FY22 core net profit stood at RM690.8m (up 13% YoY), which is 2% above our estimate (and 1% below consensus) – in line with expectations. 4QFY22 DPS of 14.0 sen took FY22 DPS to 38.0 sen, which is higher than our estimate of 33.1 sen due to our lower dividend payout assumption.

Overall performance in FY22 was lifted by a 25% increase in revenue to RM1.46b as pre-tax profit jumped 80% to RM1.02b. In terms of pre-tax profit breakdown, the office segment was the top contributor (flattish at RM464.4m) followed by the retail division (up 57% to RM379.9m). In addition, the hotel operation reduced its pre-tax loss to RM23.6m (compared with FY21’s pre-tax loss of RM66.0m) as sequential quarterly pre-tax loss narrowed from RM12.9m in 1QFY22 to RM8.3m in 2QFY22 to RM2.4m in 3QFY22 and to just RM0.1m in 4QFY22.

Outlook. With retail tenant sales already surpassed the pre-Covid level (at 124%) and footfall hovering at around 82% of the pre-Covid threshold, business will likely be back to normal for the coming year. Already, 4QFY22 saw slowing growth momentum as tracked by its revenue of RM413.3m (+11% QoQ) and core net profit of RM187.6m (+6% QoQ). Thus, reflecting the dissipating base effect, a normalised forward earnings pattern is anticipated. By business segment, the office division will continue to log high occupancy rate (which stood at 100% end-December 2022, given its long-term, locked-in leases with high quality tenants) while the occupancy rates for both the retail (at 92% end-December 2022) and hotel (after rising to 44% from 16% in FY21) divisions are projected to pick up going forward.

Forecasts update. Notwithstanding a backdrop of elevated inflationary environment and economic uncertainty, the anticipated return of overseas tourists this coming year may provide a lift to overall earnings outlook. Post results, our net profit forecasts stand at RM726m (unchanged) for FY23 and RM751m (new) for FY24. Correspondingly, we are projecting DPS of 36.3 sen (unchanged) this year and 39.5 sen (new) next year, implying yields of 5.1% and 5.6%, respectively.

Still MARKET PERFORM. Our TP of RM6.60 in maintained, 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-than-expected occupancy rates.

Source: Kenanga Research - 2 Feb 2023