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KLCCP’s ‘stapled REIT’ not perfect, say analysts

KUALA LUMPUR: KLCC Property Holdings Bhd (KLCCP) on Tuesday announced plans for a real estate investment trust (REIT), five months after saying it might do so to boost shareholder returns.

Its decision to have a “stapled REIT” or two-in-one structure, however, only met market hopes halfway as most analysts had expected a pure or standalone REIT.
A standalone REIT would be free of what analysts call a “holding company” discount — something that KLCCP’s “stapled REIT” structure would still face but to a lesser extent.

Yet looking from KLCCP’s perspective, the market should not be entirely surprised with the board’s decision.

By having the REIT stapled to KLCCP as a single entity, the new KLCCP skirts the possibility of its shares being sold down in favour of a spun-off standalone REIT carrying its prized assets.

At the same time, it will also be able to derive tax benefits from a REIT structure and pay out better dividends.

But the trade-off is that being a “half-REIT”, the new KLCCP will not have the full valuations that a standalone REIT would have.

This is reflected by several target price cuts on KLCCP by analysts yesterday morning.

For example, UOB Kay Hian Research cut its target price to RM5.65 from RM6.46, while RHB Research Institute reduced to RM5.92 from RM6.50 apiece.

Both houses retained neutral recommendations on KLCCP, whose shares added 12 sen to close at RM5.70 yesterday.
UOB Kay Hian sees RM5.20 as the entry price for current KLCCP, whose listing status would be assumed by the new stapled REIT structure on completion of the exercise by June 2013.

On a more positive note, analysts are pleased that the stapled REIT will have 100% of the iconic Petronas Twin Towers office blocks — up from the current 50.5% stake — by issuing new KLCCP shares at RM5.60 apiece to its controlling shareholder, Petroliam Nasional Bhd (Petronas).

And while the exclusion of the Suria KLCC retail mall from the proposed stapled REIT structure is another disappointment to analysts, there is the promise of more value being unlocked in future as the mall could still be shifted from the holding company to the stapled REIT to gain tax benefits.

UOB Kay Hian, for instance, sees the injection of 60%-owned Suria KLCC and 100%-owned Menara Dayabumi into the stapled REIT as a possible future share price catalyst for KLCCP.

Expectations are that the injection of Suria KLCC would happen should it be able to buy out minorities.

Other assets with KLCCP that are not included in the REIT include the 75%-owned Mandarin Oriental Hotel and 33%-owned Menara Maxis office tower, which stands next to the Petronas Twin Towers. Petronas also owns other assets in the Twin Towers’ vicinity, like the KLCC Convention Centre.

Whether or not any asset injection will actually happen in future, the other interesting matter to ponder over is whether Petronas would see its stake in KLCCP rise to 75.5% from 52.6% after the exercise.

While KLCCP intends to seek Bursa Malaysia’s approval to accept less than 25% free float for its shares, Petronas would have the flexibility to sell some of its shares to other investors.

With the stapled REIT structure assuming the listing status of KLCCP on completion of the proposed exercise, an offer for sale by Petronas — should it happen — could provide Malaysia another high-profile mega capital-raising exercise next year.

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