• Keep NEUTRAL, new MYR7.59 TP (DDM) from MYR7.74, 4% upside and c.6% FY24F yield. KLCCP Stapled’s FY23 results were in line with expectations – reporting a strong recovery in the retail and hospitality segments. We think the group will continue to be stable, backed by its flagship office division, but upside to earnings may be limited, given already high occupancy rates for both the office and retail wings, which make up >90% of its bottomline.

• Results in line. 4Q23 core profit of MYR203.8m (+2% QoQ, +0.9% YoY) brought the full-year figure to MYR793.9m (+6.1% YoY) – broadly in line with expectations at 99-104% of our and Street’s estimates. On a YoY basis, FY23 revenue of MYR1.6bn improved by 11% from a pickup in occupancy rates. EBIT margin, however, dropped slightly to 63% (FY22: 65.7%) due to the increase in utility costs. Interest expense only increased by 5.3%, as 83% of KLCCP Stapled’s borrowings are on a fixed rate (cost of borrowings: 4.6%). The group recorded a FY23 DPU of 40.5 sen (FY22: 38 sen) – the highest since the stapled security’s listing.

• Hospitality back to the black. In line with management’s guidance, Mandarin Oriental turned profitable (PBT: MYR3m) as YTD occupancy levels recovered to 55% (FY22: 44%). Revenue/available room or RevPAR reached a record high of MYR506 for the year, as management highlighted the importance of balancing both occupancy and room rates to increase bottomline. Moving forward, we think the high room rates could be sustainable – partly supported by the weaker MYR – as the tourism industry continues to recover.

• Strong retail recovery. The retail segment recorded a 30% rise in footfall YoY, reflecting Suria KLCC mall’s sensitivity to the tourism industry. Occupancy rates have also improved to an average of 96% for the year (FY22: 92%). Despite such high rates, management guides for flattish rental reversion rates, but expects limited downside to the upcoming High Value Goods Tax, as turnover rent only make up a small portion of the mall’s income.

• Other highlights. The office segment recorded a marginal 0.9% increase in PBT YoY and will continue to underpin earnings with its long-term leases, in our view. Management services recorded 25% higher revenue YoY due to elevated one-off maintenance activities. A fair value adjustment of MYR221.9m was recognised for KLCCP Stapled’s office and retail assets.

• We lower our FY24F-25F earnings by 2% after adjusting our cost assumptions. Our TP incorporates a 4% ESG premium based on a 3.2 ESG score. Key upside/downside risks include changes in consumer sentiment, and higher/lower rental reversions and occupancy rates.

Source: RHB Research - 8 Feb 2024