KLCCP’s FY2016 top-line growth flat due to weaker hotel segment

KLCC Property Holdings Bhd (Jan 23, RM7.81)

Maintain hold with a lower target price of RM7.30: KLCC Property Holdings Bhd’s (KLCCP) financial year 2016 (FY2016) top-line growth was flat (+0.2% year-on-year [y-o-y]) due to weaker hotel performance, which offset the healthy 3% y-o-y revenue growth from management services and flat revenue from the retail and office segments.

All in, FY2016 core net profit of RM714.8 million was broadly in line with our estimate but below consensus at 98% and 95% of the respective full-year forecasts. A fourth quarter FY2016 distribution per unit (DPU) of 9.9 sen (+1% y-o-y) was declared, bringing FY2016 DPU to 35.7 sen, which we deem in line at 102% of our full-year DPU forecast of 35 sen.

KLCCP’s office segment revenue saw flattish growth in FY2016 while its retail segment inched up 0.2% y-o-y. The former was due to stable office rental rates while the latter was driven by positive rental reversion and lease renewal rates. The office occupancy rate was maintained at 100% but the retail occupancy rate declined to 85% in FY2016 mainly due to its tenant-remixing exercise. The FY2016 pretax profit for its office segment grew by 0.4% y-o-y while retail pretax profit dropped marginally (0.7% y-o-y).

FY2016 hotel revenue declined 4% y-o-y due to the commencement of guest room refurbishment in the Mandarin Oriental (MO) and lower food and beverage contribution from rebranding of the Sultan Lounge and Casbah. The hotel segment posted a pretax loss of RM3.2 million in FY2016 (FY2015 profit before tax [PBT]: RM3.9 million). We expect the MO’s occupancy rate to remain at circa 47% as competition in the luxury hotel segment remains rife while its guest room refurbishment is only due for completion by end-2018.

Moving forward, we expect earnings to remain steady on sustained occupancy rates from Suria KLCC as it focuses on creating dedicated precincts to enhance customer experience. Moreover, its office segment should see a slight upside on rental reversion rates for Menara Dayabumi. However, we do not project significant improvement from its hotel segment until the MO’s refurbishment is fully completed and also given the increasingly difficult operating environment due to heightened competition.

We reduce our FY2017 to FY2018 earnings per share (EPS) by 4.2% to 4.4% to incorporate FY2016 numbers and account for lower hotel revenue contribution in FY2017 and FY2018 of 2% (versus 5%) and introduce FY2019 EPS. We also raise our risk-free rate assumption imputed in our dividend discount model to 4.2% (versus 3.6%) to reflect the rise in 10-year Malaysian government securities yields due to the heightened market volatility.

We note that KLCCP’s share price has always traded at a premium to its peers as most of its assets are locked in triple-net leases with secured tenants. Thus, we consider KLCCP’s earnings more resilient and sheltered from a downturn in the office segment than its peers. — CIMB Research, Jan 23

This article first appeared in The Edge Financial Daily, on Jan 24, 2017. Subscribe to The Edge Financial Daily here.