We came away from KLCCSG’s 2Q15 briefing yesterday feeling positiveabout its growth prospects. Maintain NEUTRAL and MYR7.06 TP (0.3% upside). We believe KLCCSG will be able to sustain its earnings growthdue to stable rental reversion from Suria KLCC and its office assets. Additionally, the recently-refurbished Levels 2 and 3 of Mandarin Oriental (MO) should help to offset weak hospitality demand.

Progress on Kompleks Dayabumi. KLCC Stapled Group (KLCCSG)management shared that the progress of Kompleks Dayabumi (KD) is currently in Phase 3 of redevelopment – the demolishment of its City Point podium. Additionally, the plans to convert the atrium spaces on Levels 2, 3 and 4 into office area with an estimated 35,000 sq ft of gross floor area (GFA) are well underway. Thus, the REIT expects the asset to be able to meet its deadline for completion in 2019.

Retail segment to remain resilient. Management disclosed that Suria KLCC mall enjoys a 17% YTD growth in footfalls despite soft consumer sentiment. Aside from that, new tenants – both luxury and new comers, had been brought into the mall during the quarter to enhance its retail offerings. These include Alexander McQueen, Mamma san restaurant, Box of Bricks, Piquandro and Dal.Komm Coffee. Additionally, the mall registered about 5% positive rental reversion during the quarter and managed to renew 40% of the leases due for renewal this year. We think that going forward, Suria KLCC will be able to maintain the current rental reversion rate as it is a matured mall and one of the preferred luxury malls in Greater Kuala Lumpur (KL).

Hospitality prospects. Given the current weak demand for luxury hotels and the impending entry of upscale/boutique hotels and serviced apartments, we believe the hospitality segment will continue to face a challenging environment. However, we think the recently-completed refurbishment of Levels 2 and 3 of MO – which brings new features to the hotel – will likely help to offset the weak demand.

Maintain NEUTRAL. We retain our earnings forecasts, NEUTRAL call and SOP-based TP of MYR7.06. Despite the current headwinds in both office and hospitality segments, KLCCSG should be able to sustain its earnings going forward due to its: i) stable rental reversion from Suria KLCC and its office assets, ii) strong tenancy profiles, and iii) robust balance sheet.