This article first appeared in The Edge Financial Daily, on May 10, 2016.

KLCCP Stapled Group
(May 9, RM7.25)
Maintain neutral with a target price (TP) of RM7.10: KLCCP Stapled Group’s (KLCCP) first quarter of financial year 2016 (1QFY16) core net income of RM182.8 million was within our and consensus expectations. Distribution per unit of 8.6 sen was declared for 1QFY16.

Core net income for 1QFY16 improved marginally by 2.4% year-on-year (y-o-y) to RM182.8 million, mainly driven by its hotel division’s turnaround, while contributions from its office and retail divisions were flattish. 

The hotel division was profitable in 1QFY16, compared to a pre-tax loss of RM3.2 million in 1QFY15, as renovation works of common areas and facilities hit the hotel business in 1QFY15.

On the other hand, performance of the office division was stable with profit before tax (PBT) growing at 0.6% y-o-y, due to its long-term lease agreement, while the retail division recorded a PBT growth of 0.4%, due to positive rental reversions in Suria KLCC.

Meanwhile, core net income for 1QFY16 shed by a marginal 0.8% q-o-q, mainly due to weaker contributions from the hotel division, which we believe could be attributed to seasonally lower tourist arrivals in the first quarter, and weaker demand for luxury hotels due to a soft business pace.

We believe the outlook for the retail division (Suria KLCC) should remain stable as positive rental reversions should remain intact (estimated at a low single digit) despite the backdrop of cautious consumer sentiment, banking on the prime location of Suria KLCC. Meanwhile, contributions from the office division are expected to stay stable, underpinned by its long-term lease agreement.

Nevertheless, we reckon that the outlook for its hotel operations would be challenging due to weak demand for luxury hotels.

Overall, core net income for FY16 is estimated to grow 4% y-o-y in FY16, to RM719 million, mainly due to the hotel division’s turnaround, and stable earnings contributions from the retail and office segments. Its dividend yield is estimated at 4.8% based on the latest closing price.

We maintain “neutral” with a TP of RM7.10. Our TP is based on the dividend discount model with a required rate of return of 8%. While we like KLCCP — being the largest real estate investment trust in Malaysia — with a stable outlook for its retail and office divisions, we reckon that the challenging business environment in the luxury hotel market may partially drag KLCCP’s performance. — MIDF Research, May 9