KLCC Property Stapled Group (Aug 3, RM7.51)

Maintain hold with a higher target price (TP) of RM8: KLCC Property Stapled Group (KLCCPSG) reported first half of financial year 2016 (1HFY16) results that were in line with our and the street’s estimates. Revenue and operating profit saw marginal growth year-on-year (y-o-y), given steady contributions from the office and retail segments. A second interim dividend per share of 8.6 sen has been proposed for the second quarter of FY16 ended June 30, 2016 (2QFY16), compared with 8.34 sen in 2QFY15.

KLCCPSG reported a profit after tax and minority interest of RM360.6 million for 1HFY16, a 0.6% growth y-o-y, coming in within our and the consensus expectations, making up 48% of forecasts. While revenue saw a 2% y-o-y growth to RM669.3 million, operating costs were up by 6.8%, causing the earnings before interest and tax margin to fall by 1.1 percentage points to 74.5%. Despite a higher 1HFY16 revenue of RM71.1 million, which was 7.6% higher y-o-y, from hotel operations, the unit made an operating loss of RM1.8 million for the quarter due to weaker market conditions, resulting in a 1HFY16 loss before tax of RM4.7 million.

Overall, KLCCPSG’s 1HFY16 operating profit saw a marginal growth of 0.5% y-o-y, underpinned by its steady office and retail portfolios, representing 53% and 41% of 1HFY16 operating profit respectively.

Earnings should continue to be relatively stable for both the office and retail sectors in FY16, due to triple net leases of office assets and resilient retail rental income from Suria KLCC (with rental reversion and organic growth amid a more cautious outlook), while the hotel segment may continue to be weaker due to reduced consumer demand and occupancy. Recall that a long-term lease with ExxonMobil has been secured for 15 years.

We maintain “hold” on KLCCPSG, though with a higher 12-month dividend discount model-derived TP of RM8 (including 26 sen from the redevelopment of Dayabumi and 24 sen from the potential development of Lot D1), given a change in methodology. In line with the recent cut in the overnight policy rate, our risk-free rate assumption has been revised from 4% to 3.5%.

KLCCPSG’s long-term potential is underpinned by an asset injection pipeline of approximately RM5.8 billion, backed by its strong parent company and attractiveness as a syariah-compliant stock.

KLCCPSG’s long-term (up to 2019) asset-enhancement initiatives and asset-injection plans are driven by growth from its inbuilt pipeline (redevelopment of the City Point podium at Kompleks Dayabumi into a 200,000-sq-ft retail area, 600,000 sq ft of offices and a 500-room hotel [2015 to 2019]) and the potential development of an office tower on Lot D1 into a 1.3 million sq ft gross floor area.

Downside risks include an economic downturn, inflationary pressure, declines in tenancy rates, incoming supply (16 million sq ft from retail and 11.7 million sq ft from the office market [2016 to 2021]), higher debt-refinancing rates and correction in asset prices, while the upside risks are a rebound in tourist arrivals and improvement in consumer and business sentiment. — Affin Hwang Investment Bank Bhd, Aug 3

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This article first appeared in The Edge Financial Daily, on Aug 4, 2016. Subscribe to The Edge Financial Daily here.

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