This article first appeared in The Edge Malaysia Weekly on June 19, 2017 - June 25, 2017

WITH the iconic Petronas Twin Towers looming over Suria KLCC, it is hard to imagine the current challenging retail environment having any impact on the mall. However, the crowded retail market in the Klang Valley might not have spared the upmarket shopping centre.

KLCCP Stapled Group — which owns and manages office, retail and hotel properties and has a 60% stake in Suria KLCC retail mall — has seen declining earnings in the past year. KLCCP Stapled Group comprises KLCC Property Holdings Bhd and KLCC REIT.

At RM999.3 million, the group’s operating profit slipped below RM1 billion in its financial year ended Dec 31, 2016 (FY2016) — it achieved an operating profit of RM1.01 billion for the first time in FY2014 — on the back of declining results in the office, retail and hotel segments. The average occupancy rate in the retail segment dropped to 96% from 98% in FY2016.

Revenue remained stable at RM1.34 billion. The retail segment contributed 35.4% to total revenue compared with 44% for the office segment. Suria KLCC contributed 92% to the retail segment, with the balance coming from the retail podium in Menara 3 Petronas.

The downward trend in the occupancy rate appears to be continuing this year as the group’s latest results for the financial quarter ended March 31, 2017 (1QFY2017) saw the average occupancy rate fall to 95% from 97% in 1QFY2016. If it remains at this level, it would be even lower than the rate of 96% in FY2016. The lower occupancy rate is reflected in its financial results as the retail segment’s revenue and profit before tax slipped 1.4% and 1.8% to RM121.8 million and RM92.8 million respectively. The group attributed the lower occupancy rate to the transition for retail mixing.

It is worth noting that towards the end of the first quarter this year, Melium Group hosted an exclusive shopping event to mark the closing of its two-decade-old luxury multibrand boutique in Suria KLCC, Aseana, as it relocates to Pavilion KL under a new name and brand, M Pavilion. Hermès, a French luxury fashion brand that had a shop in the mall, also closed a while ago. Some retailers told The Edge that rents have been reduced for new tenants.

This raises the question as to whether Suria KLCC has lost its shine as one of the country’s premium malls. In its response to questions from The Edge, KLCCP Stapled Group says the mall sees revisions in its tenancies every year and all revisions have been upwards thus far, while rents for speciality shops have increased annually.

“As reported in our 1QFY2017 performance, Suria KLCC did report higher rents from new tenants and lease renewals, which was however, offset by the reduced occupancy in transition for retail mixing,” the group says in an email.

In presenting its first-quarter financial performance, the group says new tenants that have opened shop in the mall during that period included Brooks Brothers, Tory Burch, Hyper Gear and Sunglass Hut.

With the pressure on the retail segment as well as its office and hotel business, most analysts who cover KLCCP Stapled Group have a “neutral” outlook. Bloomberg consensus data shows that 75% of analysts covering the group have a “hold” call, 16.7% are calling “sell” and only 8.3% recommend a “buy”.

Year to date (as at June 15), the group was one of the underperformers among the 30 constituent companies of the FBM KLCI. It fell 3.7% to RM7.81 during the period compared with the benchmark index that has surged 9%. Compared with the real estate investment trusts on the stock exchange, KLCCP Stapled Group has also underperformed as the portfolio of REITs has gained 3.2% YTD.

Despite the underperformance, KLCCP Stapled Group is trading at a trailing price-earnings ratio of 31.49 times. In comparison, Pavilion REIT, which has Pavilion mall in its portfolio, is trading at a PER of 16.88 times while IGB REIT, which manages Mid Valley Megamall and The Gardens, is at 21.96 times. The premium valuation of KLCCP Stapled Group could be because it owns Petronas Twin Towers — the world’s highest twin towers.

Nonetheless, the group offers a decent 12-month trailing dividend yield of 4.56% based on last Thursday’s close of RM7.81. A look at the historical 12-month distribution payout shows a rising trend from 10 sen per unit in 2012 to 35.65 sen as 1QFY 2017.

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