Contractors bidding for KLCCP's prime parcel

BIDDING for the last piece of land in the Kuala Lumpur city centre belonging to KLCC Group Bhd has started, say executives familiar with the matter.

Some contractors have already submitted bids to build a retail and office building on the 1.5-acre "Lot D".

Analysts expect the development of Lot D, located next to the Mandarin Oriental Hotel, to start by the end of the year. "The development of Lot D is a potential catalyst for the stapled REIT," says the analyst covering the stock at UOB Kay Hian Research. "It will take about three to four years to develop the land."

RHB Research recently raised its fair value for the stock to RM7.65 from RM6.56, as it revised its assumptions on Lot D's market value in its sum-of-parts valuation.

The local research house raised its valuation for Lot D to RM1,200 psf from RM1,000 psf, in tandem with the market value of land in the area.

It has been a month (at time of writing) since KLCC Property Holdings Bhd's (KLCCP) stapled REIT debuted on Bursa Malaysia and the stock has been trending down.

The stock debuted at a 20-sen premium to KLCCP's last share price of RM7.25 prior to trading suspension. It hit RM7.68 on its first day of trading as a stapled REIT, but had dropped to RM6.83 by June 12.

"The stock had run up quite a bit prior to the stapled REIT's listing. At RM7.30, its yield was about 4%, which is at the low end of the industry average. This is assuming the company pays a net dividend of 30 sen next year as targeted," says the analyst at UOB Kay Hian Research.

"However, if the share drops to RM6.50 for a yield of 4.5%, investors will likely come in to support it again."

According to a report released by independent advisers in March, the "stapled security" is forecast to be at 30.95 sen in FY2013, an 87.58% increase from the dividend of 16.5 sen paid out by KLCCP in FY2012 ended Dec 31.

Hong Leong Investment Bank Research recently downgraded its call on KLCCP to a "hold" due to the strong performance of its share price. "We now value KLCCP as a REIT and estimate that based on a projected blended 80% payout for the stapled security, a 4.5% dividend yield would give us a target price of RM7.06, versus the previous target of RM6.60 based on a 5.5% dividend."

An analyst with a local research house opines that most of the good news has already been factored into the stock's price.

"The stapled REIT has started to come down because investors are switching to higher beta stocks from dividend-paying ones post-election," she says.

Maybank Investment Bank Research notes that the valuation of REITs, especially the large caps, appears to have fallen to the low end of the historical range and offers limited upside at current levels.

"KLCCP now offers a net yield of 4.1% versus Pavilion REIT's 4.3%, CapitaMalls Malaysia Trust's 4.5%, Sunway REIT's 4.5% and IGB REIT's 4.5%. In the property sector, we prefer developers to REITs as we believe the current 'risk-on' environment favours pro-cyclical asset classes."

Meanwhile, RHB Research expects KLCCP REIT's earnings growth over the short term to be driven organically.

"However, we do note that KLCCP REIT has the balance sheet strength to acquire more assets. Based on the pro-forma balance sheet, KLCCP REIT's gearing is only 0.18 times, giving it a debt headroom of close to RM2.8 billion for acquisitions, before hitting the SC's 0.5 times gearing cap."

KLCCP REIT was listed on May 9 and is the largest of its kind in Malaysia, with a market value of RM13.3 billion. It has a total asset size of about RM15.4 billion, almost three times larger than Sunway REIT.

About 70% of the stapled REIT group's value will be derived from the REIT assets, while the remaining 30% will come from KLCCP.

The first-of-its-kind stapled REIT offers shareholders higher yields, while the company will still have ownership of some of its strategic property assets.

KLCCP REIT houses the Petronas Twin Towers, Menara ExxonMobil and Menara 3 Petronas while the assets parked under KLCCP are Suria KLCC, Menara Dayabumi, Mandarin Oriental, Lot D and Menara Maxis.

Chief executive officer Hashim Wahir had said in April that the group was also considering injecting its other asset — Menara Dayabumi — into the REIT, but not in the near term, as it was looking to redevelop the building to enhance its value.

In the first quarter ended March 31, 2013, KLCCP's net profit was down by 13% year-on-year to RM88 million.

This was due to the weaker performance of Mandarin Oriental, as hotel operations saw lower occupancy rates as well as the cost of renovating the ballrooms.

However, the decline in earnings was cushioned by improved rental and occupancy rates at its offices and retail assets.

This story first appeared in The Edge weekly edition of June 17-23, 2013.

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