• Maintain NEUTRAL, new DDM-derived MYR7.74 TP from MYR7.37, 7% upside and 6% yield. KLCCP announced that it has entered a share purchase agreement (SPA) with the existing shareholders of Suria KLCC for the acquisition of 40% equity interest in the latter, for a purchase consideration of MYR1.95bn. The acquisition is expected to be completed in 2Q24, and will be fully satisfied via external borrowings.

• The acquisition. KLCCP, which currently owns 60% of Suria KLCC, has entered a SPA to acquire the remaining 40% equity interest from existing shareholders – Ocmador (Malaysia) City Retail Centre, Port Moresby Investments, and Bold Peak – for a purchase consideration of MYR1.95bn. Suria KLCC will then be a wholly-owned subsidiary of KLCCP.

• Plenty of debt headroom. As at Sep 2023, KLCCP’s MYR2.4bn in borrowings (comprising sukuk murabahah and term loan facilities) only translates to a 13% gearing ratio. The acquisition is estimated to raise its gearing ratio to 24% – still below the average of 28% of REITs under our coverage. Hence, due to KLCCP’s absolute size and relative gearing ratio, we think there is ample room to acquire more properties. This would be the first acquisiton since management unveiled a three-pronged growth strategy last year.

• Accretive to earnings. After changing our minority interest and financing costs assumptions, we raise our FY24-25 earnings estimates by 1-3%. We think the acquisition is a low-hanging fruit for the group’s intention to grow its investment proeprties. The prospects for the mall remain encouraging as the occupancy rate has recovered to 98% as at Dec 2023 (from a low of 92% in FY22). It’s iconic landmark makes it a tourist hotspot, and the group should benefit from the pick-up in tourism activities. However, we are conservative on the upside to rental reversion due to its already-high average rental rate and increasing competition in the area.

• Lower tax rate? Currently, only the three office buildings – Petronas Twin Towers, Menara 3 Petronas, and Menara Exxonmobil (60% of the group’s investment properties) – are parked under KLCC REIT, and benefits from 0% tax rate. As Suria KLCC will be fully owned by the group, any absorption into the REIT will further lower the tax rate of just 11.9% in 9M23.

• Maintain NEUTRAL. Our TP incorporates a 4% ESG premium based on a 3.2 ESG score. Upside and downside risks include timing acquisitions, faster/slower-than-expected tourism industry recovery, higher/lower-thanexpected rental reversion and/or occupancy rates.

Source: RHB Securities Research - 29 Jan 2024