KLCCP paying a premium for its strength

by **Cals** Fri 06 Sep 2013, 12:22

KLCCP paying a premium for its strength
Business & Markets 2013
Written by Affin IB Research
Friday, 06 September 2013 11:15
KLCC PROPERTY HOLDINGS BHD []
(Sept 5, RM6.46)
Maintain add at RM6.46 with a revised target price of RM6.85 (from RM7.50): We walked away from KLCCP’s Corporate Day feeling neutral.

Management has dislodged its 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 the redevelopment of Lot D1 and Menara Dayabumi in Kuala Lumpur. Phase 2 of Menara Dayabumi’s redevelopment includes renovation of the corporate lobby of the 36-storey building. Work is progressing as scheduled and is expected to be completed in October.

Phase 2 also involves the redevelopment of City Point at Dayabumi into a 60-storey hotel comprising 500 rooms. Under Phase 3, one million sq ft of office space will be built. CONSTRUCTION [] will likely begin in the second quarter (2Q) of 2014 after the anchor tenant is identified.

KLCCP is also in the process of securing an anchor tenant (possibly an oil and gas player) for its Lot D1 mixed development, which will have 1.4 million sq ft of gross floor area. The development is slated to be completed within three to five years should KLCCP succeed in finalising the investment decision by year-end.

As at end-June 2013, KLCCP was lowly geared (debt to assets) at 15% versus peers’ 17% to 31%. Hence, we believe KLCCP can gear up for the future redevelopment of Menara Dayabumi or Lot D1 without slowing its dividend per share growth in view of its strong balance sheet and strong annual effective cash flow of RM600 million to RM760 million over 2013 calendar year (CY13) to CY15E.

In addition, management clarified that rental income receivable for Petronas Twin Towers and Petronas Tower 3, which includes a 3% hike every three years, is recognised on a straight-line basis over the 15-year lease pursuant to the requirements of MFRS 117.

This effectively means that KLCCP 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 (TP) to RM6.85 (from RM7.50) after revising our FY13 to FY15E forecasts to account for a change in our rental income and dividend payout assumptions.

At our TP of RM6.85, KLCCP will trade at a 4.6% implied FY14 dividend yield, a 23% premium to big cap real estate investment trusts’ average FY14 yield of 6%.

We think this is fair given its superior earnings visibility, strong tenant base, strong parentage, large market cap and prime asset locations. KLCCP’s current foreign shareholding is slightly above 9%, or near its record low. Maintain “add”. — Affin IB Research, Sept 5

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This article first appeared in The Edge Financial Daily, on September 06, 2013.