KrisAssets rises on speculation of a REIT

KUALA LUMPUR (Nov 23): The mundane shopping mall operator KrisAssets Holdings Bhd came to life on Tuesday, rising by 40 sen to close at RM5, its highest in recent times.

The stock, which was the top performer in terms of share price appreciation, has surged 18.2% since Nov 1, a significant rise for the stock that has traded in the range of between RM4 and RM4.40 over the past six months.

KrisAssets announced its results for 3QFY11 ended September on Tuesday, recording a net profit of RM58.1 million from RM32.2 million a year earlier, an 80% rise. Its revenue also increased 8.8% to RM91 million from RM83.6 million. The company proposed a single-tier interim dividend of 7.5 sen per share for FY11.

The results aside, analysts noted that the surge in share price could be due to speculation of the establishment of a retail real estate investment trust (REIT) following the recent completion of its purchase of the The Gardens shopping mall in July from parent IGB Corp Bhd.

"KrisAssets' current property asset is the 10-year-old Mid Valley Megamall. With the completion of the purchase of The Gardens, there is the possibility of a REIT being set up to take advantage of the tax benefits," said an analyst.

To qualify as a REIT, a fund must have most of its assets and income tied to a portfolio of real estate. In Malaysia, a REIT is exempt from corporate tax if it distributes at least 90% of its total annual income, and unit holders enjoy a lower 10% withholding tax on distribution.

Another point favouring a REIT is that it is an asset class that is not affected by market sentiments as its share price is backed by assets.

The assets that KrisAssets holds, solely retail malls, command better demand due to higher returns.

"Compared to office spaces, retail REIT are supported by high occupancy rates and strong rental income. The local buying sentiment is also going strong at the moment," the analyst said.

He added that the yields of the assets in KrisAssets of between 6% and 7% are comparable to other local REIT such as Sunway REIT, CapitaMalls Malaysia Trust REIT and the soon-to-be listed Pavillion REIT.

The analyst also noted that the retail space in Mid Valley Megamall and The Gardens recently saw an increase in rental income.

However, another analyst with AmResearch said a KrisAssets REIT might not take off so soon as it does not have enough funds to purchase the remaining assets from IGB Corp.

"IGB Corp's remaining assets consisting of Mid Valley and The Gardens' office towers have an estimated combined value of RM2 billion to RM3 billion. As such, we do not think a REIT will materialise just yet," he said.

However, he does not discount a possible corporate exercise to raise funds for the acquisition of the other assets.

Speculation on the establishment of a KrisAssets REIT surfaced in February when KrisAssets agreed to buy the entire stake in The Gardens at an indicative price of RM820 million. To fund the acquisition, KrisAssets issued RM300 million in convertible secured bonds.

As at Sept 30, KrisAssets had RM72.8 million in cash and bank deposits. KrisAssets is 75.66% owned by IGB Corp.

On its 3QFY11 results on Tuesday, KrisAssets attributed the improved performance to higher rental income and lower property maintenance costs. The group also saw a recognition of revaluation surplus of RM25 million for Mid Valley Megamall.

"Excluding the fair value gain on investment property, the group recorded pre-tax profit of RM55.1 million, representing a 20.6% increase, compared with pre-tax profit of RM45.7 million in the corresponding quarter [last year]," it said.

For 9MFY11, KrisAssets' net profit grew 27.6% to RM170.8 million, on the back of RM273.1 million in revenue.

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