KLCCSG’s 2QFY13 results came in line with expectations. 1H net profit surged 52.3% y-o-y on cost savings from lower minority interest and tax expenses  after  the  completion  of  its  stapling  exercise  on  9  May.  We raise  our  FY13-14  forecasts  by  4-11%  as  we  had  underestimated  the cost savings earlier. We lift our FV to MYR6.90 (from MYR6.84) given the slightly higher DPS forecasts. Maintain NEUTRAL. 
 
- Within  expectations.  The  2QFY13  net  profit  of  MYR186.6m  (+103.6% y-o-y; 112.2% q-o-q) for KLCC Stapled Group (KLCCSG), which consists of KLCC Property Holdings and the newly-formed KLCC REIT, came in line  with  estimates.  Earnings  were  mainly  boosted  by  the  cost-saving initiatives stemming from the inception of the REIT. KLCCSG declared a second dividend of 7.45 sen during the quarter, bringing total YTD DPS to 11.95 sen.

- Stapling  completion  leads  to  significant  cost  savings.  1H  revenue grew 10.9% y-o-y due to better contribution from the property investment division,  which  increased  19%  y-o-y.  This  was  despite  a  decline  in contribution  from  the  hotel  operations  division  due  to  a  one-off  boost from the World Gas Conference last year. We believe that the inception of KLCC REIT on 2 April coupled with the subsequent completion of the stapling exercise on 9 May led to KLCCSG’s improved performance. Tax expenses  declined  30.2%  y-o-y  to  MYR63.4m  in  1HFY13  from MYR90.8m  in  1HFY12,  as  earnings  from  KLCC  REIT  are  tax-exempt. Furthermore,  1H  minority  interest  charge  also  dipped  6.3%  y-o-y,  as KLCCSG now owns 100% of the Petronas Twin Towers (previously only 50.5%).

- Maintain  NEUTRAL.  We  raise  our  FY13-14  forecasts  by  4-11%  after adjusting our minority interest charge and tax expense assumptions. Our SOP-based  fair  value  is  now  lifted  to  MYR6.90  (from  MYR6.84)  after adjusting our dividend stream. Despite the market’s recent correction, we believe that KLCCSG’s valuation remains rich,  with  an  implied  dividend yield  of  about  3.5%,  which  is below  the  current  bond  yield of  3.9%  and the MREIT sector’s average yield of 4-5%. Furthermore, we believe that the  market  has  largely  priced  in  all  the  positive  news  from  the  stapling exercise.

Source: RHB