KLCC’s 1HFY23 net earnings of RM361.4m (+11% YoY) and YTD distributions of 17.3 sen are within expectations. The group has registered sustained growth across its key businesses with most notable gains seen in the hotel space. We maintain our assumptions and TP of RM7.18 (based on a 5.5% target yield) but upgrade the stock to OP (from MP). The current share price presents opportunities to take a position on KLCC’s prime asset portfolio with the added resiliency from high-income consumer segments.

Within expectations. KLCC’s net profit for 1HFY23 of RM361.4m met expectations, representing 50%/48% of our full-year forecast/consensus full-year estimates. An interim distribution per unit of 8.8 sen (YTD: 17.3 sen) is on track to achieve our FY23 DPS of 36.3 sen.

YoY, 1HFY23 revenue of RM775.4m grew by 15% mostly thanks to better contributions from: (i) hotel operations (+74%) with higher occupancy from domestic guests; and (ii) management services (+33%) as activities and car park income surged with the increase in overall foot traffic. In spite of the higher revenue, pre-tax profit only rose by 12% as operating expenses increased from higher utility costs owing to ICPT adjustments. Overall, 1HFY23 net profits came in at RM361.4m (+11%).

Outlook. With businesses now operating close to pre-pandemic levels, the earnings pattern seen in 1HFY23 is expected to hold up in the coming quarters. During the first half of the year, retail footfall climbed by 48%, indicating that consumer spending is likely to remain robust (strong). It was also supported by the rising moving annual turnover (MAT) of KLCC tenants by 37% in 1HFY23. We opine that forward earnings will continue to be underpinned(supported) by: (i) the office division’s high occupancy rate (100% at end-June 2023, given its long-term, locked-in leases with high quality tenants), (ii) the retail division’s 12 new tenants that increased the mall’s occupancy rate during 2QFY23, (iii) the hotel operation’s stride to hopefully break even in the medium term as the occupancy ratio picks up (close to 50% from c.62% prior to Covid-19), as well as (iv) the management services’ improved maintenance during the quarter with the rise in transient (+13% YoY) and season car park customers (16% YoY). Meanwhile, the group has expressed interest in exploring global assets to add to its portfolio but would prioritise improving the efficiency of local operations first.

Forecasts. Post-results, we maintain our FY23F/FY24F earnings.

Upgrade to OUTPERFORM on an unchanged TP of RM7.18. Our TP is based on our FY24F gross DPU of 39.5 sen against an unchanged target yield of 5.5% (derived from a 1.0% yield spread above our 10-year MGS assumption of 4.5%). The low yield spread reflects KLCC’s prime asset portfolio (as anchored by its office towers in the KLCC area and Suria KLCC mall), which we believe is underappreciated at current price points. We opine that the group’s target markets could be less affected by inflationary headwinds, proven by the increase in MAT reported by the group. 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 expansion, (ii) lower-than-expected rental reversions, and (iii) lower-than-expected occupancy rates.

Source: Kenanga Research - 15 Aug 2023