News Yesterday, KLCC Property Holdings (KLCCP)
share price hit its 52 week high of RM4.02 before settling at RM3.93 (25% Ytd
returns) or above our previous TP of RM3.50.
Comments Recent sharp share price run-up could be
potential REIT-ing of assets or clarity of RCULS conversion.
Recall that we have highlighted the increasing likelihood of
full RCULS conversion given new Menara 3 PETRONAS (M3P) contributions and
PETRONAS Twin Tower (PTT) long-term lease renewals (Oct-12) and initially
target to upgrade the stock towards 2H12 to meet the full earnings accretion
impact in FY13 (refer to 2/4/12 report).
While we have not heard any news in the market or officially,
we are inclined to think a combination
of such corporate actions is likely and even concurrently.
Nonetheless, we still believe the parent will convert the
RCULS before or in conjunction with the REIT-ing exercise because the parent
would like to enjoy the maximum payoff from spinning off its assets.
Assuming only Suria KLCC will be REIT-ed and KLCCP only
wants to retain a controlling stake of 53% in the REIT, we expect KLCCP to enjoy cash repayments of
RM283m, which is equivalent to 22sen per fully diluted share if
the parent fully dishes out the cash received. The cash
repayments could be as high as 96sen per fully diluted share if all investment
properties are REIT-ed. (Refer overleaf for details and assumptions).
Outlook Upcoming earnings catalyst is Menara Maxis (associate
holdings) long-term lease renewals which is coming up in May-2013; we have yet
to factor for renewed long-term lease rates.
Forecast No changes to FY12-13E estimates (already
imputed for M3P contributions and renewed PTT leases).
Rating Upgrade to OUTPERFORM (MARKET PERFORM previously)
KLCCP has undergone de-rating over the last few years and is
now looking to re-rate up to its previous glory if full RCULS conversion and
REIT-ing takes place concurrently.
Valuation Higher TP of RM4.60 based on 23%* discount
to updated FD SoP RNAV of RM6.00 (previously MARKET PERFORM and TP of RM3.50
based on 33%* discount to FD SoP RNAV of RM5.23).
Risks Risk to our call lies with; 1) our scenario
or variations of it not panning out this year; 2) oversupply of office space in
KLCC area which will pressure valuations downwards; 3) decline in MO occupancy
rates.
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