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KLCC Property (Maybank IB) hold; target price RM3.07

Stable earnings, but fading excitement

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FY10 pretax profit (ex-EI) of RM534m (+2% YoY) was within our forecast and consensus. We have turned lukewarm on KLCCP as: (i) its scarcity value as a big-cap/stable rental property play will end with the imminent listing of similar market cap sized REITs, which offer higher net dividend yields, and (ii) REITs are also more tax efficient and have more visible asset injection pipelines. Downgrade to Hold, with a lower TP of RM3.07 (15% discount to FD RNAV, previously nil).

Non-cash accretive revaluation. Stronger sequential 4QFY10 pretax profit (ex-EI) of RM142m (+13% YoY, +140% QoQ) was due to higher contribution from its 33%-associate Menara Maxis (-69% YoY, +3x QoQ). Overall, EBIT margin remained stable at the 72% level. A RM758m revaluation surplus of its investment properties (+9% on FY09 book value) was made, with the bulk from the Petronas Twin Tower (+8%) and Suria KLCC (+12%). However, unless sold, asset revaluations are non-cash items and do not translate to higher DPS.

Low DPS payout. A final tax-exempt DPS of 6sen/shr was declared, totaling 11sen/shr (+5% YoY) for the full-year, representing net dividend yield of 3.3% and net profit payout of 16% (FY09: 18%). Going forward, we expect DPS to maintain at current level, given KLCCP’s high capex commitment of around RM150m p.a. over FY11-13, for the development of Lot C and refurbishment at Mandarin Oriental.

Dilutive EPS growth. We maintain our FY11-12 forecasts and introduce FY13 (+16% YoY), driven by maiden contribution from new Lot C office space (+20% of existing office space). However, FY11-13 EPS face dilution due to the 361m outstanding RCULS (+39% share base), which expires in Aug ‘14.
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