This article first appeared in The Edge Financial Daily on January 28, 2019

KLCCP Stapled Group
(Jan 25, RM7.88)
Maintain hold with an unchanged target price (TP) of RM7.55: KLCC Real Estate Investment Trust reported a steady set of results — its financial year 2018 (FY18) revenue grew by 2.9% year-on-year (y-o-y) on higher contributions across all segments. The FY18 core net profit growth was, however, lower at 0.9% due to higher depreciation expenses arising from newly refurbished hotel rooms. The retail segment was a star performer, registering a 2.8% earnings before interest and taxes (Ebit) growth on higher rental rates and occupancy. The office segment continued to enjoy full occupancy and solid profitability (amid a weak Ebit growth of 0.5%); the hotel segment has, however, remained challenging due to stiff competition in the luxury hotel market. All in, the results were within market and our expectations. In tandem with the stronger earnings, management has declared a higher FY18 dividend of 37 sen (+2.4% y-o-y).

KLCC Property Holdings Bhd’s fourth quarter of FY18 (4QFY18) core net profit grew by 2.2% quarter-on-quarter (q-o-q) to RM185.5 milliom, driven by higher revenue from the retail and management service segments. Notably, 4QFY18 retail Ebit grew by 8.3% q-o-q to RM107.3 million on higher turnover rent, positive rental reversion and the commencement of seven new tenancies in 4QFY18. This was, however, dampened by lower operating profit from the hotel segment due to lower food and beverage revenue and higher depreciation from newly refurbished rooms.

We have maintained our “hold” rating on KLCCP Stapled Group with an unchanged sum-of-parts-derived TP of RM7.55. While we like the group for its strong asset portfolio, defensive earnings stream and robust balance sheet, we believe the positives are largely priced in. With a 4.9% dividend yield estimated for FY19, valuation is comparable to the historical average and at a premium to peers, and looks fair. A key upside risk is a change in market expectations from rising interest rates to rate cuts; a downside risk is deterioration in the retail mall market. — Affin Hwang Capital, Jan 25