KLCC's 9MFY24 results met expectations, with a 7% YoY rise in CNP driven by the acquisition of 40% remaining stake in Suria KLCC that was completed in April, and higher hotel occupancy. As the decline in Suria's overall tenant sales reflected a few continued quarters of weakness in luxury sentiment, this leads us to peg a higher target yield. The resultant TP change is a mild trim to RM8.33 from RM8.38 as we also reflected housekeeping changes in cost of debt. However, considering price action, we lower the call from OUTPERFORM to MARKET PERFORM.

Within expectations. Its 9MFY24 net profit made up 72% of our full-year forecast and the full-year consensus estimate. The group also declared a estimated after-tax dividend of 8.5 sen, adding up to 25.3 sen YTD, in line with our FY24 net dividend forecast of 43 sen as the group typically declares lumpier payout in 4Q.

YoY, 9MFY24 revenue rose 6% mainly driven by Suria mall following the completion of its acquisition of the remaining 40% stake in April 2024. Top line was further supported by improved occupancy in Mandarin Oriental at 63% (from 58% in 3QFY24). On that note, after deducting higher net financing costs (+57%) owing to higher comparative rates, net profit grew by 7%.

QoQ, its top line increased by 4% mainly contributed by improved performance from Mandarin Oriental. Boosted by the full quarter recognition of 100% Suria stake, it managed to register a sharper 8% increase in net profit.

Outlook. KLCC has been able to consistently sustain high occupancy alongside positive rental reversions for its retail segment. We are also expecting stronger growth in Mandarin Oriental in 4QCY24. However, in the quarter, KLCC saw a decline in Suria's overall tenant sales which was primarily weighed down by softer luxury sentiment. On that note, we hold the view that this could hinder the growth prospect of the group in the near term.

Forecasts. Our FY25 earnings forecast is increased by 4% as we refreshed the group's average cost of debt to 4.2% for FY25 as per latest management updates.

Valuations. Given a slowdown in luxury sales which we have observed for a few quarters, we adjust the target yield higher. We tuned down our TP slightly from RM8.38 to RM8.33 based on an increased target yield of 5.5% as we raise our yield spread from 1.50% to 1.75% (on top of our unchanged 10-year MGS assumption of 3.75%), but also after incorporating lower debt cost. Our distribution is based on a 95% payout, in line with its historical averages.

Investment case. We like KLCC for its prime asset portfolio anchored by its iconic office towers in the KLCC area and Suria KLCC mall. The group is likely able to sustain a steady income stream moving forward. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). However, we have turned cautious on the luxury space which could indicate decreasing appeal for KLCC, we downgrade it to MARKET PERFORM.

Risks to our call include: (i) bond yield expansion, and (ii) lower-than- expected occupancy rates.

Source: Kenanga Research - 26 Nov 2024