Maybank: KLCC Property – Buy

*In line

3QFY10 results bore no surprises with relatively flattish trend. We expect extensions of the Suria KLCC mall (phase 2) and Lot C office space, on track for completion in FY11 and FY12 respectively, to deliver 6-12% EPS growth. Buy, for its predictable earnings, iconic assets, and growth prospects. Our RNAV-based TP is RM3.60.

*Suitable for low risk investors

RM59.2 million 3QFY10 net profit (+0.6% y-o-y, -2.5% q-o-q) was within our and market expectations. Despite higher revenue from the hotel (Mandarin Oriental) and office building (Menara ExxonMobil and Dayabumi) segments, net profit was down q-o-q on lower profits achieved by the retail division due to higher utility cost. EBIT margin contracted to 71.4% (-0.7-ppts y-o-y, -3.7-ppts q-o-q).

* On track to meet FY10 forecast

9MFY10 net profit of RM180m (+4% y-o-y) met 76% of our FY10 forecast. We do not expect any surprises to 4QFY10 results as revenue streams are predictable and defensive, backed by strong MNC tenants, which pose low collection risks. Approximately 55% of KLCCP’s EBIT is locked in long-term lease agreements with predictable rental reversions over 12-15 years at the Petronas Twin Towers, ExxonMobil and Menara Maxis.

* Slow and steady earnings growth in FY11-12

Construction at Lot C is progressing according to schedule. Suria KLCC’s mall extension (c.150,000 sq ft; +15% of existing retail space) is also on track to commence operation in 4QCY10, followed by the new Lot C office space (c.840,000 sq ft; +20% of existing office space, excluding Menara Maxis associate stake) a year later. These new additions will help deliver 6% and 12% EPS growth in FY11 and FY12 respectively.