KLCC announced the proposed acquisition of the remaining 40% stake in Suria KLCC not owned by them for RM1.95b, putting its overall value at RM4.88b. This would boost its overall bottom line contribution from the retail segment, which presently makes up c.40% of the group’s earnings. Assuming completion by 2QCY24, we raise our FY24F earnings and distribution payments by 7%. Thanks to the higher payout, we raise our TP to RM7.73 (from RM7.18, on an unchanged 5.5% target yield) and upgrade to OP call (from MP).

Acquiring the remaining 40% stake in Suria KLCC. Aside from KLCC’s 60%-stake in Suria KLCC Sdn Bhd, the remaining 40%-stake are owned by Ocmador (Malaysia) City Retail Centre Sdn Bhd, Port Moresby Investments Limited, and Bold Peak Sdn Bhd. At a price tag of RM1.95b, this translates to an overall value of Suria KLCC of RM4.88b. This seems to be below the implicit market value of RM5.63b as ascertained by an independent evaluation, suggesting that the other shareholders could be eager to liquidate their positions.

Better earnings flow-through from landmark stronghold. We are positive with the deal as it could support the desired yield of 6%-7% at a group level. Based on FY22 retail segment’s pretax profit of c.RM380m, this translates to a yield of c.7% from Suria KLCC alone based on complete ownership.

While KLCC is still responsible for the shareholders of other assets (i.e. 25% to Mandarin Oriental Hotel), we opine this move could still drastically reduce its minority interest payments as hotel operations have only recently broke even, in 3QFY23. Based on FY22 earnings, RM129m was paid in minority interest leading to group net profit of RM783m.

Forecasts. We raise our FY24F earnings by 7% as we adjust for substantially lower minority interests in 2HFY24 attached to Suria KLCC. The adjustment is premised on meeting the target completion date of 2QFY24. Meanwhile, we raise the group’s borrowings by RM1.95b per its intention to fund the acquisition via debt.

Valuations. We raise our TP to RM7.73 (from RM7.18) based on an unchanged target yield of 5.5% (derived from a 1.5% yield spread above our 10-year MGS assumption of 4.0%) against a higher FY24F DPU of 42.5 sen (from 39.5 sen) in accordance to our earnings adjustment above. Our distribution is based on a 95% payout, in line with historical averages.

Investment case. 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. Additionally, the abovementioned acquisition could support stronger distribution returns from yield seekers (up to c.6%). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Upgrade to OUTPERFORM from MARKET PERFORM.

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

Source: Kenanga Research - 29 Jan 2024