KLCC Property looking to form a REIT?

KLCC Property Holdings Bhd (June 5, RM4)
Maintain buy with target price RM4.35: It is rumoured that KLCCP will turn its property portfolio into a real estate investment trust (REIT) in the near term. As highlighted before, we believe it is just a matter of time and we would not be surprised if it materialises as it is a logical and necessary move to unlock KLCCP's deeply discounted valuations.

Our target price is unchanged at RM4.35, based on a 15% discount to our RM5.12 fully diluted revalued net asset value (FD RNAV) estimate. We reiterate "buy" on KLCCP.

KLCCP's share price has shot up by 16% in a week, to almost RM4. This is highly unusual, as KLCCP's share price had been hovering at around RM3 to RM3.40 for a long time.

If KLCCP does put its assets into a REIT, it would give an immediate boost to its valuation. KLCCP currently values its assets cheaply, at cap rates of just 6% to 7% against Pavilion's 6.2% (Pavilion KL Mall) and IGB REIT's 5.5% to 6% (Mid Valley Megamall and The Gardens Mall).

KLCCP was sidelined by investors especially after the listing of large-cap retail REIT — Sunway REIT, CapitaMalls Malaysia Trust (CMMT) and Pavilion REIT, due to their more attractive dividend yields supported by a favourable tax structure.

This was despite KLCCP's superior asset quality, strong Petroliam Nasional Bhd parentage, and its status as the owner of one of the world's iconic buildings.

With an estimated RM12 billion in assets, KLCCP would emerge as the largest REIT in Malaysia, making it more appealing to international investors.

Mature properties first, developing assets later, we believe. This will ensure earnings stability given the huge capex for the developing properties: Kompleks Dayabumi and Lot D. Of the mature properties, we are excited about the Petronas Twin Towers, Petronas Tower 3, Menara ExxonMobil and Suria KLCC.

The offices are backed by long lease agreements (five to 15 years), while Suria KLCC (a major tourist attraction) enjoys more than 40 million footfalls per year.

KLCCP currently trades at a 23% to 29% discount to its RM5.56 fully diluted net tangible assets and our FD RNAV estimate.

Note that our valuation of KLCCP's properties is rather conservative, with cap rates of 6% to 7.5% (cap rates of 5% to 7% would boost our RNAV by 15%, to RM5.85). As at March 2012, KLCCP's net gearing stood at 21%, including RM714 million in redeemable convertible unsecured loan stocks (1% interest, RM1.98 exercise price). — Maybank IB Research