KLCC Property Holdings
No major impact expected from higher costs in 2014
KLCCP's triple net lease agreements for its office assets imply that it would not be significantly impacted by the higher utilities cost and assessment rates as they would be borne by its master tenants. While this means downside risk to earnings is limited, we note that earnings upside would also be limited given the lack of asset injections. We thus maintain our Hold call on the stock, with an unchanged DDM-based target price of RM5.90. For exposure to Malaysian REITs, we suggest investors switch to Axis REIT.
KLCCP recently held a briefing at the Mandarin Oriental Hotel, chaired by its CFO Mr. Azmi Yahaya. Its CEO Datuk Hashim Wahir was also present at the briefing that was attended by over 20 analysts and fund managers. We were surprised that KLCCP is not too concerned about the higher utilities and assessment rates for 2014. The reason for this is that most of its assets are under the triple net lease agreement with its tenants.
What We Think
Additional costs would not impact KLCCP. The company highlighted that for most of its key properties, like the Petronas Twin Towers and Menara ExxonMobil, it has signed triple net lease agreements that put the burden of higher utilities cost and assessment rates on the lessees (master tenants). While KLCCP would be bearing the hike in utilities cost for the common areas of some buildings like its shopping mall, it expects to be able to pass on most of the higher cost to its tenants via an increase in service charges. Its current service charge for Suria KLCC mall stands at RM5 psf. KLCCP expects to recover c.70% of the total increase in costs for its common areas. We thus believe the higher costs would not have any significant impact on KLCCP’s bottomline in 2014.
What You Should Do
Although KLCCP would not be significantly affected by the higher costs, we believe that its earnings outlook is also expected to remain subdued as we gather that asset injections are not likely anytime soon. Meanwhile, its internal developments, like Menara Dayabumi and Lot D1, are still 2-3 years away from being likely injection candidates into its REIT.