Largest prime property owner in KLCC

Largest prime property owner in KLCC
Tags: Brokers Call | HLG Research | KLCC Property Bhd

Written by Financial Daily
Monday, 16 November 2009 11:09

KLCC Property Bhd
(Nov 13, RM3.29)
Hold at RM3.39: We recently visited KLCC Property (KLCCP) and initiate coverage with a hold as its share price is in line with our RNAV-derived (revised net asset value) price target of RM3.16. Earnings catalyst will come from Lot C and Lot D1 developments, but these will be long-dated, and earnings from the hotel segment are expected to be flat until 2013.

We like KLCCP for its earnings stability and visibility. While geographical concentration is high with 88% of net lettable area (NLA) situated within the KLCC area, rental income base is diversified. Over the last three years, KLCCP’s investment PROPERTIES [] have on average enjoyed capital appreciation of 22% per year, which in turn translates to scope for rental revisions. KLCCP also has a 75% stake in 5-star hotel Mandarin Oriental KL.

KLCCP’s prime assets provide a strong tenants base; blue-chip tenants include Petroliam Nasional Bhd (Petronas), ExxonMobil, Tanjong City Centre Property Management Sdn Bhd, Parkson, Isetan and Cold Storage. These quality tenants are expected to be prompt in payments and maintain a long-term presence in their current locations, while rental revision agreements will ensure sustained growth in rental income.

KLCCP’s investment properties have varying rental rates, with the iconic Petronas Twin Towers fetching the highest rental rates for office space (fixed at RM9.50 psf under the head lease agreement with Petronas). Rental revisions typically occur every three years, allowing sustainable income growth over the long term.

Crucially, KLCCP has been able to secure long-dated lease agreements with key tenants such as Petronas (15 years), Isetan (24 years), ExxonMobil (12 years) and Tanjong Group (15 years). Also, Menara ExxonMobil’s rental rate was previously below the market rate at RM5.25psf but has now been revised to RM7.45psf.

KLCCP enjoys not only stability of rental income, but also upside from capital appreciation of its properties. With more than 100 acres of land and 5.8 million sq ft of NLA in the super-prime KLCC area, KLCCP is well-poised to benefit from rising commercial property valuations and rentals in the heart of KL.

RCULS (redeemable convertible unsecured loan stock), however, is a complicated issue for the company and minority shareholders. KLCCP has issued RM714 million of RCULS to KLCCH, which if converted could lead to a heavy 38% earnings per share dilution. The conversion would also likely trigger a general offer which it wishes to avoid. Full conversion is mandatory on the 10th anniversary in 2014/2015. However, the RCULS provides cheap source of financing for KLCCP (1% interest per annum). Management has until 2014 to come up with a solution that balances the interests of the various parties involved. — HLG Research, Nov 13


This article appeared in The Edge Financial Daily, November 16, 2009.