KLCCP Stapled Securities (“KLCC”) 5235SS

Last: RM5.57

Introduction

KLCC has declined by 28% from a peak of RM7.75 in mid 2013 to current RM5.57. Its current share price is expected to provide a decent gross dividend yield of 5.9%.

Even pricing at 1x P/B of RM6.48, the yield is still generous at 5.1% considering the super-prime location of its assets, beneficiary of VMY2014, ability to pass through cost increases and gear up for future growth.

Also, current share price is another window for minorities to invest at level similar to PETRONAS during the corporate exercise of creating KLCC in middle of last year.

Company Description

KLCC Property Holdings Bhd (“KLCCP”) was listed on the Main Board of Bursa Malaysia on 18 August 2004.

KLCCP owns a diverse property portfolio largely within the KLCC Development comprising Suria KLCC (a leading shopping mall), Mandarin Oriental KL (a luxury hotel), PETRONAS Twin Towers, Menara ExxonMobil and Menara 3 PETRONAS (Office Buildings). KLCCP also has 33% interest in Menara Maxis. Outside the KLCC Development, KLCCP owns Kompleks Dayabumi which is located within the older central commercial area of Kuala Lumpur.

KLCCP’s strength is reflected through its premium assets centred within the KLCC Development, one of the largest integrated real estate developments in the world.

In 2013, KLCCP undertook a corporate restructuring exercise which involved the restructuring of KLCCP group into a stapled structure known as KLCCP Stapled Group where the existing ordinary shares of KLCCP are stapled together with the units in KLCC Real Estate Investment Trust (“KLCC REIT”) forming the resultant KLCCP Stapled Securities (“KLCC”) and were listed under the “REITs” sector of the Main Market of Bursa Malaysia on 9 May 2013.

Business Overview

KLCC business segments are:-

1. Office properties
2. Retail properties
3. Hotel property
4. Management services

For FYE Dec 2013, it reported 8.5% jump in revenue to RM1.33bil (FYE Dec 2012: RM1.17bil) and also 9.1% increase in PBT to RM875mil (FYE Dec 2012: 802mil). 

Why KLCC is worth accumulating at current level?

      1.            Super-Prime location

In 2011/2012, the Group secured long term triple net lease agreements for PETRONAS Twin Towers, Menara 3 PETRONAS and Menara ExxonMobil office for a period of 15 years. The long term nature of the lease insulates the Group from the high impending supply of office space into the market. The assets are fully occupied with 15-year tenancies and three yearly upward rental revisions by three per cent. The gross rentals of their offices range between RM7.35 psf/month (Menara 3 PETRONAS) to RM10.50 psf/month (Menara Maxis), matching Grade A office asking rentals.

Meanwhile, upcoming increase in supply of retail malls are mainly small community types which relies on respective catchment areas. KLCC offers different shopping experience as evidenced by the retail segment of Suria KLCC maintaining its customer footfalls of over 41 million with total sales turnover of around RM2 billion per annum. Its average gross rental continued to live up to its reputation as the premier landmark centre in Klang Valley, commanding RM34 psf/month currently. 

2.            VMY 2014 to boost or stabilize patronage

The Government has announced an allocation of RM1.2 billion for operating and investment expenditure which include promotion and advertising costs for the upcoming Visit Malaysia Year (“VMY 2014”) programmes. The country is targeting 28 million international tourist arrivals with corresponding tourist receipts of RM76 billion for VMY 2014. The scheduled opening of KLIA2 in middle of this year, the entry of more airlines and the increase in airline routes and flight frequencies are expected to augur well for the Malaysian hospitality industry. Suria KLCC is expected to benefit from such tourists flow. This bodes well for KLCC. 

      3.            Cost-pass-through to tenants

The Triple Net Lease agreements for PETRONAS Twin Towers, Menara ExxonMobil and Menara 3 PETRONAS shall be able to pass through utilities and assessments hike. For the properties not under the Triple Net Lease agreements, KLCC intends to pass on the incremental costs to tenants through higher service charges (according to a visit note by RHB Research on 15 January 2014).

Even under worst case scenario of not being able to pass through the recent rate hikes of:-·        

• commercial electricity rates raised by 16.85% with effect from 1 January 2014, and
• assuming increase in DBKL assessment tax rates by 100%

the Distributable Income would only be lowered by 3.7%. Meanwhile, the effect on expected Dividend Per Share for FY2014 will be very minimal, lowering from current 33sen (fully pass through) to 31sen (fully absorb the increase).

      4.            Low net gearing for future expansion

Its gearing ratio stood at 14% as at December 2013, which is far below the 50% gearing cap allowed for REITS structure. Furthermore, being a PETRONAS subsidiary, it should be able to ride on the strong credit profile of PETRONAS to secure low borrowing rate. Borrowing cost of KLCC currently stands at around 4.80% p.a. which is at the low end compared to its peers.

5.            Revisit to previous entry cost of Petronas in KLCC

To recap, the earlier corporate restructuring exercise to create KLCC includes injection of remaining 49.5% stake in Midciti Resources Sdn Bhd by PETRONAS for RM2.86billion.

The asset injection was paid via the issuance of 510.6million new KLCC shares at an issue price of RM5.60 which effectively raises PETRONAS ownership in the Group from 52% towards 75%. Minorities now have the second chance to invest into a high quality stock at level similar to PETRONAS in middle of last year.