Target Price: RM6.12
Lacking Near-Term Catalysts
We attended KLCC’s briefing and came away feeling neutral. There was no new development on either “REIT-ing” Suria KLCC or potential asset acquisitions. In terms of Lot D1 and the additional building space in Citypoint@Dayabumi, new anchor tenants are yet to be secured, and thus, they are reluctant to start works until then. Menara Maxis’ long-term lease renewals are also delayed until year-end. No changes to estimates. Foreign shareholding is slightly above 9% or near its low. The share price has shot up by 6.2% since our Result Note (22-Aug). The 10-year MGS yields had sharply compressed to 3.6% from yesterday’s 4.0% on the back of a stronger Ringgit. Nonetheless, we believe yield appetites are much higher than pre-GE levels given higher levels of uncertainties. Maintain TP of RM6.12 based on FY14E target dividend yield of 5.1%. With a total return of -1%, and limited upsides to FY14E earnings, we downgrade the stock to UNDERPERFORM from MARKET PERFORM.
REIT-ing of Suria KLCC? During the REIT-ing of its office assets, there were expectations that Suria KLCC may be REIT-ed although this expectation has since abated. Meanwhile, management was silent regarding this matter. We believe the main issue lies with the steep asking price for the 40% minority stake in Suria KLCC and we take the stance that it is unlikely to happen this year.
Acquisition pipeline still quiet... The company is positioned for new acquisitions and developments given its current low gearing (based on asset) of 0.16x or net gearing of 0.10x. One of the potential acquisitions is from its parent (e.g. Alamanda mall); also now, KLCC is open to third party acquisitions. We noticed the reliance on anyone's parent company pipeline of assets can also mean that assets are likely to be acquired at peak performances, and thus prices, as parent company tends to “REIT” matured assets. Nonetheless, we think that the asset acquisition environment is not ideal at the moment as cap rates are still at a record-low, i.e. tougher to get yield accretive acquisition, which is an industry phenomenon as experienced by other MREITs as well.
…and so is Lot D1. Currently, the office space project is under design phase and KLCC has yet to secure an anchor tenant and is reluctant to start work until then. We believe the anchor tenant will likely be a PETRONASrelated entity. If they can secure an anchor tenant by early next year, work will start by end FY14 to early FY15. We have yet to build the CAPEX assumptions into our estimates.
Dayabumi additional NLA still pending. There are no changes in their FY13E CAPEX of RM80m, which is mainly for Phase 1 refurbishments (lift lobby and common areas). Phase 1 should be completed by early next year. As for Phase 2, work has not started. To recap, the plans are to redevelop Citypoint@Dayabumi into a new building (about 0.5m sf NLA or 500 rooms). While management has secured a hotel operator, they will only start construction upon securing an anchor tenant. We will only factor in Phase 2 once management has secured the tenant. Either way, significant contributions will be, at the earliest, from FY17 onwards. On a positive note, management did say that given their low gearing level, cost of Phase 2 will not affect dividend payouts. We estimate Phase 2 CAPEX to be c. RM300m over a 2-3 year period which has minimal impact on its gearing.
Menara Maxis long-term lease renewals are delayed to year-end. The lease term ended in May-13. However, management clarified that they are in the process of negotiation and have decided to keep the current lease terms until year-end. We did not impute the new rental rates for Menara Maxis in FY13E but have already done so for FY14E, as per the prospectus guidance. Additionally, management also clarified that; (i) the variance between its PATAMI, distributable income and actual dividend payouts is due to FRS117 (finance lease method); and (ii) variance with the KLCC Stapled REIT prospectus is due to the actual commencement of the Stapled REIT structure on 2-Apr as opposed to 1-Jan. We have imputed for all the factors mentioned above, but resulting in no changes to our estimates.