• Upgrade to BUY from Neutral, new DDM-derived MYR7.79 TP from MYR7.30, 12% upside with c.6% FY23F yield. KLCCP Stapled kicked off FY23 on strong footing, with an improved YoY performance across all segments, particularly in the retail and hotel segment. Suria KLCC’s occupancy rate increased to 96% (2022: 92%) as four new tenants signed leases to occupy space in the shopping mall. We are positive on the group’s prospects, as it is well positioned to benefit from the improving tourism sector while being supported by its stable office segment.

• Results in line. 1Q23 core profit of MYR195m (-3.5% QoQ, +10.9% YoY) is broadly in line with expectations, at 26% of ours and Street’s full-year estimates. On a YoY basis, 1Q23 revenue increased 18.3% (-7.9% QoQ) as all segments recorded stronger numbers in tandem with the continued pickup in economic activities. Interest expenses only increased slightly following the interest rate hikes (+1% QoQ, +6.7% YoY) as 83% of the group’s borrowings are on fixed rates, and its net gearing remains low at 18.3%. A DPU of 8.5 sen was declared for the quarter (1Q22: 8 sen).

• Retail remains strong. Since the onset of the COVID-19 pandemic, Suria KLCC’s occupancy rate dropped to 92% in 2022 from 99% in 2019. However, in 1Q23, it picked up again to 96% as four new tenants began operating in the mall, including Nitori and Pak John Steamboat & BBQ. Tenant sales remain strong, at 17% above pre-pandemic levels – mostly driven by fashion and F&B tenants, but footfall is at just 85% of pre- pandemic levels. With the mall’s higher occupancy level, we believe it is better positioned to benefit from the gradually improving tourism sector.

• Hotels to turn around. Mandarin Oriental Kuala Lumpur still reported a slight MYR2.3m pre-tax loss (1QFY22: -MYR12.8m, 4QFY22: -MYR.095m) with an average occupancy rate of 50%. Revenue per available room continues to track higher (1Q23: MYR462; 4Q22: MYR337), due to pent-up demand for high-yielding rooms, and management believes the rate can be sustained moving forward. With 1Q typically being a slower quarter for hotels, management is expecting the segment to break even in FY23 as the tourism sector continues to improve.

• We raise FY23-25F net profit by 2-3% after factoring in Suria KLCC’s higher occupancy rate. Our TP includes a higher 4% premium (vs 3% previously), as we have increased our ESG score for KLCCSS to 3.2.

• ESG framework update. As there is now a greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 30 May 2023