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Tuesday, July 7, 2009

Brokers’ mixed views on KLCCP

HWANGDBS Vickers Research has maintained its buy call on KLCC Property Bhd (KLCCP) at RM3.20 with a target price of RM3.70 as it has the most defensive earnings in the sector from locked-in rental income from blue-chip tenants on long-term leases.

It added that although there has been a recent shift from luxury to 4-star business hotels, Mandarin Oriental’s occupancy rate was still at a respectable 65% and the company has no plans to cut its high average room rate (ARR) of RM635 per room per night.

However, KLCCP was actively seeking new markets which could prove challenging in the short term given the ongoing global financial crisis and Influenza A (H1N1) outbreak.

Also, Suria’s retail extension was expected to be completed by mid-2010 and would be fully operational by end-2011, it said, adding the office tower was scheduled to be completed by end-2011.

“Negotiation for a potential single anchor tenant on a long-term triple-net-lease basis is still ongoing, with rental expected to be between current rates for Maxis Tower and Petronas Twin Towers.

“Lot C could potentially bring in RM135 million of annual rental from FY13 onwards,14% gross yield based on estimated rental of RM10 per sq ft,” it said.

It noted that with the abolishment of Foreign Investment Committee (FIC) approval and bumiputera equity requirement for mergers and acquisitions (M&As), commercial and international standard properties would be the biggest beneficiaries.

“KLCCP is also a prime beneficiary of asset reflation. With the improved perceived investibility of Malaysian properties, we could possibly see an increase in volume of transaction and higher property prices. KLCCP is the largest commercial property owner in the super prime KLCC area.”

The research house also said that RM150 million to RM200 million of annual cash flow would be freed up for potential M&As and/or dividends after the maturity of Twin Towers’ debts in 2012.

The Twin Towers’ rental revision of 9% every three years (next one scheduled in November to RM9.50 psf) provides support to cash flows (but no earnings impact due to straight-line recognition of lease income per FRS117).

It added KLCCP has fully exhausted its S108 credits, so future dividends would be single-tier as in 25% tax payable versus shareholders’ tax bracket previously.

FY09 financing cost fell 10% on the back of two debt refinancing exercises (Mandarin Oriental and Suria) and improved net gearing (33% vs FY08’s 40%).

“FY10 will see full-year impact of the debt refinancing and rental revision for Menara Exxon Mobil (constitutes 3% of Ebitda). This should help cushion the weaker hotel contribution, while bulk of earnings would come from locked-in rental income from blue-chip tenants, including parent Petronas,” it said.

Meanwhile, CIMB Research downgraded KLCCP to underperform due to lack of positive catalysts and increasing preference by investors for higher beta developers.

“Although dividend yield of the stock at 4% can be considered decent compared with fixed deposit rates of 2%-2.5%, it pales in comparison with Malaysian REITs which average 10% as well as the broader market at 5%,” CIMB said.

In addition, the outstanding RM688 million 1% redeemable convertible unsecured loan stocks (RCULS) are eligible for conversion into ordinary shares at RM1.98 starting August, it said. If converted, it would enlarge the group’s share capital by 37% to 1,281.5 million shares.

“If the RCULS are not converted over the next five years, on the 10th anniversary they can be converted at a conversion price of only RM1. “This would expand the share cap by a wider 74%. KLCC Prop management will seek to minimise the dilutive impact on existing shareholders,” the research house said.

KLCCP closed at RM3.16, down four sen.

By The EDGE Malaysia (by Financial Daily)

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