KLCC’s 9MFY23 results met expectations. It registered sustained growth across its primary businesses with most substantial gains seen in the hotel segment. We maintain our forecasts and TP of RM7.18 but downgrade our call to MARKET PERFORM from OUTPERFORM as its valuations have become rich after the recent run-up in its share price.

Within expectations. KLCC’s net profit for 9MFY23 of RM546.7m met expectations, representing 76% and 74% of our full-year forecast and consensus full-year estimates, respectively. An interim distribution per unit of 8.8 sen (YTD: 26.1 sen) is on track to achieve our FY23 DPS of 36.3 sen.

YoY, 9MFY23 revenue of RM1.18b grew by 13% largely due to its: (i) hotel operations (+49%) with higher occupancy of 64% from international guests, that were mainly from China, Singapore, and UK, and (ii) management services (+30%) as higher maintenance activities were undertaken. Despite the higher revenue, pre-tax profit only increased by 9% as operating expenses increased from higher utility costs owing to ICPT adjustments. Overall, 9MFY23 net profit came in at RM546.7m (+9%).

QoQ, revenue increased by 2%, mainly attributed to higher occupancy and higher room rates for Mandarin Oriental, and the increasing footfall to their malls. As operating expenses were relatively stable, this cascaded to a 3QFY23 net profit of RM185.3m (+3%).

Outlook. We anticipate a positive outlook for the upcoming quarter, driven by the approaching festive seasons. With businesses now operating close to pre-pandemic levels, the earnings pattern seen in 9MFY23 is expected to hold up in the coming quarters. YoY, retail footfall climbed by 39%, indicating that consumer spending is likely to remain robust. We opine that forward earnings will continue to be supported by: (i) the office division’s high occupancy rate (100% at end-Sept 2023, given its long-term, locked-in leases with high-quality tenants), (ii) the retail division’s eight new tenants that increased the mall’s occupancy rate during 3QFY23, (iii) the hotel operation’s stride to hopefully break even in the medium term as the occupancy ratio picks up (52% from c.62% prior to Covid-19), as well as (iv) the management services’ improved performance during the quarter with the rise in transient (+8% YoY) and season car park customers (11% YoY). Meanwhile, the group has expressed interest to explore global assets to add to its portfolio but would prioritise improving the efficiency of local operations first.

Forecasts. Maintained.

We also maintain our TP of RM7.18 based on our FY24F gross DPU of 39.5 sen against an unchanged target yield of 5.5% (derived from a 1.5% yield spread above our 10-year MGS assumption of 4.0%. The low yield spread reflects KLCC’s prime asset portfolio (as anchored by its office towers in the KLCC area and Suria KLCC mall). We opine that the group’s target markets could be less affected by inflationary headwinds, proven by the increase in MAT reported by the group. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Downgrade to MARKET PERFORM from OUTPERFORM as its valuations have become rich after the recent run-up in its share price.

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

Source: Kenanga Research - 29 Nov 2023