KLCC PROPERTY HOLDINGS BHD By Affin Investment Bank

by **Cals** Fri 06 Sep 2013, 08:45

KLCC PROPERTY HOLDINGS BHD
By Affin Investment Bank
Add (maintained)
Target price: RM6.85

WE walked away from KLCC’s corporate day feeling neutral.
Management has dislodged the intention to buy out the remaining 40% stake in Suria KLCC held by CBRE Global Investors.
We attribute this to the high asset pricing and consequently the “REIT-ing” is unlikely to materialise anytime soon.
We gathered that management will continue to focus on development of Lot D1 and Menara Dayabumi.
The redevelopment for Phase 2 on Menara Dayabumi, includes renovation works on the corporate lobby of the 36-storey building.
This is on schedule and is expected to be completed in October.
Meanwhile, KLCC has secured a hotel operator for the next phase of Dayabumi, which will involve the redevelopment of City Point building into a 60-storey building comprising 500 hotel rooms with 1mil sq ft of office spaces (Phase 3). Construction works will likely begin in second quarter of 2014 after the anchor tenant is identified.
Similarly, KLCC is in the midst of securing an anchor tenant (possibly an oil and gas player) for its Lot D1 mixed development with 1.4 millon sq ft of gross floor area.
The development is slated to be completed within three to five years should KLCC succeed to finalise the investment decision by year-end.
As at end June 2013, KLCC was lowly geared (debt/asset) at 15% versus peers’ 17% to 31%.
Hence, we believe KLCC can gear up for the future redevelopment of Menara Dayabumi or construction of Lot D1 without slowing its dividend per share (DPS) growth (for example, KLCCP has continued to grow its DPS annually even during the construction of Lot C) in view of its strong balance sheet and strong annual effective cash flow of RM600mil to RM760mil over calendar years 2013 to 2015.
In addition, management clarified that rental income receivable for Petronas Twin Towers and Petronas Tower 3, which include a 3% hike every three years is recognised on a straight-line basis over the 15-year lease pursuant to the requirements of Malaysian Financial Reporting Standard (MFRS) 117.
This effectively means that KLCC will recognise the same amount of rental income throughout the lease period, but would adjust its realised distributable income level based on the actual revenue.
We have lowered our target price to RM6.85 (from RM7.50) after revising our financial years 2013 to 2015 forecasts to account for a change in our rental income and dividend payout assumptions.
At our target price of RM6.85, KLCC will trade at a 4.6% implied financial year 2014 dividend yield, a 23% premium to big cap MREITs’ average financial year 2014 yield of 6.0%.
We think this is fair given its superior earnings visibility, strong tenants base, strong parentage, large market cap and prime asset locations.
KLCC’s current foreign shareholding is slightly above 9%, or near its record low. We maintain “add”.