Would KLCC Property do a REIT?

KUALA LUMPUR (Mar 21): Now that IGB Corp Bhd's low-profile Tan family has finally found it worthwhile to inject the Mid Valley Megamall and The Gardens Mall into what's potentially Malaysia's largest retail real estate investment trust (REIT), investors' eyes are trained on whether KLCC Property Holdings Bhd (KLCCP) would take the same path.

After all, KLCCP houses an enviable collection of prime commercial assets, which include the iconic Petronas Twin Towers office blocks and the Suria KLCC mall, collectively valued at RM10.14 billion. These two assets alone double the RM4.3 billion to RM4.6 billion that the two malls in Mid Valley City is said to have fetched, based on a 5.3% capitalisation rate.

However, the decision on a KLCCP REIT may require some number crunching for Petroliam Nasional Bhd (Petronas), which owns 52.6% of KLCCP and is also a major tenant and significant revenue contributor to KLCCP.

For other minority shareholders — including the second largest shareholder, the Employees Provident Fund Board, which owns 9.4% of KLCCP — a decision by KLCCP to inject its mature assets into a REIT, should it happen, would likely be a mega windfall. That's going by how quickly the share prices of IGB Corp and its subsidiary KrisAssets Holdings Bhd rocketed on news of the impending injection of their malls into a REIT.

At the closing price of RM2.89 on Tuesday, IGB shares have gone up over 17% year-to-date and 65% in the past six months from its recent low in early October. Similarly, at its RM7.09 close on Tuesday, KrisAssets have gained 13.4% year-to-date and easily 50% over the last six months since news of the planned REIT got out.

At current levels, IGB has a market capitalisation of RM4.3 billion and is trading at 1.2 times book while KrisAssets fetches 1.6 times book and has a RM3.1 billion market cap. The re-rating is due to expectations of huge windfall from injecting the malls into the planned REIT, either in the form of a special dividend from the proceeds raised or free REIT shares. Sentiments are also buoyed by prospects of an office REIT from IGB at a later stage.

In comparison, KLCCP, which gained eight sen or 2.5% to close at RM3.30 on Tuesday, was trading at a 34% discount to its diluted net asset per share of RM5 as at Dec 31, 2011.

At RM3.30, KLCCP's market cap stood at RM3.08 billion, just below that of KrisAssets' and over RM1 billion smaller than IGB's.

In a recent note, Maybank Investment Bank Research analyst Wong Wei Sum pointed out that rising competition from REITs, with more attractive tax structures, may have been why KLCCP's share price performance had been lacklustre despite the quality of its assets.

Wong, for one, reckoned that KLCCP going for a REIT "is not impossible, for now" and "could materialise" by first injecting its mature assets into a REIT and the rest at a later stage when they mature. The analyst, who is among the more bullish ones tracking KLCCP, has a RM4.35 target price for the stock, 31.8% higher than its current level. The target price was derived from a 15% discount to KLCCP's revised net asset value of RM5.12 per share.

KLCCP's net gearing "remains healthy" at only 0.26 times as at December 2011, Wong wrote in a recent note. "We continue to like KLCCP for its deep-value valuations, relatively low rental (default) and debt risks and strong Petronas parentage," the analyst wrote.

Others like CIMB Research, in a Feb 27 note, told investors seeking stable dividend yield to look at REITs like CapitaMall Malaysia Trust and Pavilion REIT, which offered higher yields of between 5.6% and 5.8% compared with KLCCP's 3.7%.

Describing KLCCP as a stock that is "stuck in the middle, offering lower earnings growth than property developers and lower dividend yields relative to Malaysian REITs," CIMB has an "underperform" recommendation and RM3.03 target price.

For the nine months ended Dec 31, KLCCP made RM458.62 million in pre-tax profit, excluding RM1.14 billion in fair value adjustment gains, and had said it would pay 10 sen per share or RM93.4 million in dividend for the period. From April 2011, KLCCP changed its financial year-end to Dec 31 from March 31.

Notably, if the Petronas Twin Towers and Suria KLCC mall were to be injected into a REIT, a third prime asset may also come into the picture, a market watcher reckoned. KLCCP also owns 33% of Menara Maxis, valued at RM672 million as at end-March 2011.

Businessman Ananda Krishnan-controlled Tanjong plc owns the remaining 67% of Menara Maxis, the freehold office tower next to the Petronas Twin Towers in Kuala Lumpur that houses the headquarters of Tanjong and Ananda's flagship telecommunications player, Maxis Bhd. Based on KLCCP's carrying value of Menara Maxis, Tanjong's 67% stake of the property is worth about RM450 million.

Ananda, who had in recent months sold Tanjong's power assets for RM8.5 billion and its numbers forecast operator Pan Malaysian Pools Sdn Bhd for reportedly RM2 billion, may be willing to part with the stake in Menara Maxis at the right price. Whatever the case, any income Tanjong's remaining assets can fetch is sheer profits as Ananda's original investment cost is a lot less that the RM8.8 billion Tanjong was valued at when he took the company private in July 2010.

Besides the 33% of Menara Maxis, 60% of Suria KLCC and 50.5% of Petronas Twin Towers, KLCCP also owns 100% of Menara ExxonMobil, 75% of Mandarin Oriental Hotel and 100% of Kompleks Dayabumi. Additionally, there is also the 100% of Menara 3 Petronas, which is the new Lot C office block slated for a 15-year lease to Petronas. Furthermore, a new Lot C retail would add 140,000 sq ft of net lettable area to the existing one million sq ft of retail space at Suria KLCC. In total, KLCCP's investment properties were worth RM12.36 billion as at Dec 31.

Having seen investors' reaction to IGB and KrisAssets, would KLCCP too break out of its current mould and win a re-rating from investors?

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