INVESTMENT HIGHLIGHTS

• Stable earnings in FY17

• Office division to remain stable

• Growing tenant sales

• Higher hospitality demand

• Maintain NEUTRAL with a revised TP of RM7.59

Stable earnings in FY17. We attended results briefing of KLCCP Stapled Group (KLCCP) and came away feeling neutral on the earnings prospect of KLCCP. To recap, core net income of KLCCP in FY17 was flattish at RM720.4m (+0.2%yoy) mainly due to higher contribution from office and hotel divisions.

Office division to remain stable. Revenue of office division in FY17 was flattish as additional rental income from Menara Dayabumi cushioned the two-month downtime tenant transition at Menara Exxonmobil. Recall that 40% of net lettable area was left vacant in January 2017 while KLCCP secured long term leases with Petronas to take up the 40% space in Menara Exxonmobil. Going forward, profit of office division is expected to remain stable due to full occupancy of its office towers and its long-term leases structure. Note that rental rate of Menara 3 Petronas was revised higher in December 2017 on fixed step-up basis. Meanwhile, next rental reversion of Petronas Twin Towers which is also on fixed step-up basis will be in Oct 2018.

Growing tenant sales. Core earnings of retail division were stable in FY17 by growing 1.5%yoy. Note that core earnings excluded backcharge of rental from a tenant in FY16. The higher earnings were mainly driven by higher rental rates in FY17. Meanwhile, retail division recorded 5.6% growth in tenant sales in FY17, underpinned by Beauty & Skincare and Jewellery & Gift segments. Going forward, retail division is expected to support by prime location of Suria KLCC.

Higher hospitality demand. Hotel division returned to the black in FY17 due to higher occupancy rates of newly renovated Club rooms and Suites in Mandarin Oriental and improved contribution from banqueting business and F&B. Meanwhile, overall refurbishment of Mandarin Oriental is ongoing. First phase of renovation was completed in July 2017 while second phase of renovation has commenced and expected to complete by end of 2018.

Source: MIDF Research - 26 Jan 2018