KLCC Property poised for growth

KLCC Property (Feb 27, RM3.40)
Maintain buy with revised target price RM3.75 from RM3.70: Net profit ex-revaluation gains for 3QFY11 came in at RM68 million (-7% year-on-year [y-o-y], -11% quarter-on-quarter [q-o-q]), bringing 9MFY11 core earnings to RM189 million, making up 95% of our estimates and 89% of consensus.

Top line growth for 3QFY11 (+10% y-o-y, +7% q-o-q) was driven by improvements across the board, mainly from Menara 3 (Lot C) retail (fully fitted out), higher hotel food and beverage contribution and stronger car park management services.

Earnings before interest and tax (Ebit) margin however declined 4.6 percentage points y-o-y and 5.5 pps q-o-q to 8% due to Menara 3 pre-opening costs and hotel depreciation charges.

Finance cost fell 14% y-o-y, 8% q-o-q, following the refinancing of Twin Towers debts (partially offset by charge-out of interest expense capitalised for Menara 3 retail).

A  five sen dividend per share was declared, bringing FY11 DPS to 10 sen (44% payout, similar to previous years).

Earnings for FY12F will be underpinned by full-year contribution from Menara 3 office (completed in December 2011) and retail, as well as organic growth from Suria, Menara ExxonMobil (lease extended to 2017) and Petronas Twin Towers (lease expiring in September 2012 with expected reversion of rental to somewhere closer to sub-lease rate of RM13 psf).

KLCC Property remains attractive as a defensive play with super prime commercial assets in KLCC and potential for further capital management (fully diluted dividend yield of 6% against the Malaysian REIT average of 7%).

Further re-rating catalysts include: (i) conversion/placement of RCULS shares; (ii) conversion into a REIT; and (iii) gearing up of its balance sheet for asset acquisitions.

Maintain "buy" with a slightly higher RM3.75 target price (30% discount to revalued net asset value of RM5.35) after rolling over valuations to FY12. — Hwang DBS Vickers Research, Feb 27