Hotel, retail segments drive KLCCPSG’s revenue higher

KLCCP Stapled Group
(May 12, RM6.47)
Maintain add with target price of RM6.53: KLCCPSG reported profit after tax and minority interest of RM184 million (+110% year-on-year [y-o-y]) for the first quarter ended Jan 31 of financial year 2014 (1QFY14). The robust earnings growth was due to the injection of certain assets (Twin Towers, Menara ExxonMobil and  Menara 3 Petronas) into KLCC Real Estate Investment Trust.

For 1QFY14, a dividend per share of 8.65 sen was announced. Annualised, it was in line with our full-year forecast of 33.5 sen. No revaluation surplus was recorded this quarter.

KLCCPSG’s 1QFY14 revenue (+9.8% y-o-y) was backed primarily by stable office rental revenues (43.6% of total revenue), which was underpinned by triple-net lease agreements for Twin Towers and Menara 3 Petronas.

A rebound in hotel revenue (+35% y-o-y, due to higher food and beverage, and room revenue) and an increase in management services revenue (41% y-o-y) propped up overall revenue. This translated into a stronger operating profit, 10.8% y-o-y, while earnings before interest and taxes margin improved 77% in 1QFY14 from 76.4% in 1QFY13.

KLCCPSG’s current gearing level of 24% underpins the group’s ability to gear up by another RM4.25 billion (up to the maximum limit of 50%) without having to raise new equity.

Though KLCCPSG’s near term earnings will be largely driven by organic growth and asset enhancement initiatives at Menara Dayabumi (which also includes an office tower with net lettable area of one million sq ft), the group’s longer-term plans are expected to be more exciting, with the development of Lot D1 into a tower with a gross floor area of 1.3 million sq ft.

We reiterate our “add” rating on KLCCPSG with a dividend discount model-derived target price of RM6.53 (8.3% cost of equity, 6% equity risk premium and 3% terminal growth rate). Compared to other big cap M-REITs, which trade at an average price-to-net asset value (NAV) of 1.08 times, KLCCPSG trades at 1.0 times, close to its NAV of RM6.49 as at March, primarily due to its below-industry dividend yield of 5.2% for FY14 and 5.5% for FY15 (vesus big cap M-REIT yields of 5.9% to 6.2%).

KLCCPSG’s upside remains limited at 1.1% given the lack of near-term rerating catalysts, but we believe investors who are looking towards the group’s asset injection and stable cash flows should hold for a longer horizon.

Key risks are: (i) slowdown in consumer spending; (ii) inflationary pressure; (iii) decline in tenancy rate; (iv) new office supply in the market over 2014 to 2016 (+15.4 million sq ft in total), with a supply of potentially more than 10 million sq ft in 2017; (v) higher debt refinancing rates; and (vi) a shift in investors’ portfolio to other sectors as well as yield compression plays.

This article first appeared in The Edge Financial Daily, on May 14, 2014.