KEY INVESTMENT HIGHLIGHTS

• 9MFY20 earnings slightly below expectations

• Earnings recovered in 3QFY20

• Lower 9MFY20 earnings dragged by retail and hotel divisions

• Challenging outlook for retail and hotel division

• Maintain NEUTRAL with a revised of RM7.48

9MFY20 earnings slightly below expectations. KLCCP Stapled Group (KLCCP) 9MFY20 core net income of RM474m came in slightly below expectations, meeting only 69% of our and consensus full year estimates. The slight negative deviation could be attributed to the weaker than expected income from retail division in 3QFY20 as a result of rental assistance granted to tenants. Meanwhile, distribution per unit (DPU) of 7.5sen was announced for 3QFY20, bringing cumulative DPU to 23.3sen in 9MFY20.

Earnings recovered in 3QFY20. On sequential basis, 3QFY20 core net income improved to RM156.7m (+11.5%qoq) mainly due to recovery of retail division from adverse impact of MCO. Retail division recorded higher profit before tax (PBT) of RM74.9m (+57.7%) as 2QFY20 income was dragged by higher rental assistance granted to tenants during MCO. Similarly, pretax loss of hotel operations narrowed to RM16.3m in 3QFY20 from pretax loss of RM20.4m in 2QFY20 as restriction to operate was eased post MCO. Meanwhile, PBT of office division was little-changed in 3QFY20.

Lower 9MFY20 earnings dragged by retail and hotel divisions. On yearly basis, 3QFY20 core net income was lower at RM156.7m (- 13.6%yoy), bringing 9MFY20 cumulative earnings to RM474m (- 13.1%yoy). The lower earnings were mainly dragged by retail and hotel divisions. PBT of retail segment declined by 22.5%yoy due to rental assistance granted to tenants in 2QFY20 and 3QFY20. Meanwhile, hotel division was in the red by recording pretax loss of RM45.6m in 9MFY20 as the hotel division was hit by Covid-19 pandemic. On a brighter note, PBT of office division increased by 0.6%yoy, backed by triple net lease agreements and long-term leases.

Challenging outlook for retail and hotel division. We expect outlook for retail division to be challenging in 4QFY20 due to reimposition of CMCO which will dampen shopper traffic. We reckon that the lower shopper traffic may adversely impact rental income of Suria KLCC as rental assistance may have to be granted to tenants. Meanwhile, outlook for hotel division will remain clouded by ongoing Covid-19 pandemic.

Maintain NEUTRAL with a revised TP of RM7.48. We revise our FY20/21F earnings forecast by -11%/-2.6% as we factor in higher quantum of rental assistance granted to tenants. Corresponding to our earnings downward revision, our TP for KLCCP is revised to RM7.48 from RM7.57, based on Dividend Discount Model. We maintain our Neutral call on KLCCP as we see challenging outlook for its retail and hotel divisions. Meanwhile, dividend yield is estimated at 3.9%.

Source: MIDF Research - 11 Nov 2020