Maintain OUTPERFORM on KLCC Property with an upgraded TP of RM6.87
(RM6.00 previously) based on a 5% discount to our higher FD SoP RNAV of RM7.20.
We adjusted our cap rate assumptions because IGB REIT has set new benchmarks of
5.5% and we think KLCC Property deserves better. The stock has fared well with its +97% Ytd returns given market’s
expectations of it REIT-ing its crème de
la crème assets, which are located within KLCC precinct or the most prime
address in town. We strongly believe KLCC Property REIT-ing exercise will take
place within the next 12 months given the strong price run-ups, which was
similarly observed with IGB’s KrisAssets performance prior its IGB REIT announcement.
Our higher TP assumes that all of KLCC Property’s investment properties (except
LotD1 landbank) will be REIT-ed while
assuming 100% payout (similar to sizeable M-REITs) and a target FY13E gross
dividend yield of 4.6%, which is a slight premium to its sizeable M-REIT peer
average of 4.8% and full RCULS conversion.
IGB REIT’s property
valuations are the steepest in town... IGB REIT valuation of its investment
properties Midvalley Megamall/The Gardens was based on a cap rate of 5.5%,
which is considered a record high for
retail asset valuations in Malaysia. We understand other sizeable M-REITs (e.g.
Sunway REIT, CMMT) are valuing their retail and office spaces at between 6.0%-7.0%
whilst KLCC Property mentioned that they
valued Suria KLCC (retail asset) at a cap rate of 7.0%
…providing ample
upsides to KLCC Property’s valuations. We strongly believe the KLCC precinct
story should carry richer valuations compared to IGB REIT’s Midvalley
Megamall/The Gardens. The KLCC precinct is in the heart of Kuala Lumpur and is
considered a ‘must see’ tourist attraction because of PETRONAS Twin Towers. So,
Suria KLCC does enjoy higher better footfall traffic of 40-42m p.a. vs.
Midvalley Megamall/The Gardens of 30-34m p.a. As a result, we think Suria KLCC deserves
a cap rate of 5.0%; similarly for Menara 3 PETRONAS Retail (M3PR) as it is an
extension of Suria KLCC. Its KLCC Precinct offices, particularly Menara Maxis
and PETRONAS Twin Towers (PTT) have unusually
long lease terms of 15 years (fixed step-up basis) and are occupied by strong
anchor tenants (Maxis and PETRONAS), implying these assets have lesser risks vs.
other KL office spaces, which are in oversupply; similar explanation is applied
to Menara 3 PETRONAS Office (M3PO). Hence, we raise our FD SoP RNAV to RM7.20
as we assume a more aggressive weighted average cap rate of 5.5% vs. previous
6.5% (refer overleaf).
Raise our TP to
RM6.87 (RM6.00 previously), implying a 5% discount to our higher FD SoP RNAV of
RM7.20. Our TP is based on the assumption
that all its investment property assets, except for its last landbank (Lot D1),
will be REIT-ed. Assumptions of our TP
are; 1) REIT payout structure of 100% (for the most sizeable M-REITs of
>RM1.0b market cap); 2) target FY13E gross dividend yield of 4.6% which is a
slightly more demanded target to the average gross yields of 4.8% commanded by Sunway REIT,
CMMT, IGB REIT and Pavilion REIT because of its iconic one-of-a-king status and
potential hidden values (refer below).
No changes to
FY12-13E core earnings. Although we have imputed for PTT long term lease
renewals, we have yet to do so for
Menara Maxis’. Dayabumi could also swell in valuations, although that is
perhaps post their refurbishment works in FY15. We will adjust for the
aforementioned upon further clarity from management (refer overleaf).
Source: Kenanga
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