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Still no news on RCULS conversions
We met with KLCC Property Holdings’ (KLCCP) new Head of Finance & Accounts Division, Encik Azmi Yahaya, and Head of Legal & Corporate Services Division, Encik Abd Aziz Abd Kadir.
Key Points
We attended an informal Q&A session with KLCC Property Holdings’ (KLCCP) new Head of Finance & Accounts Division, Encik Azmi Yahaya, and Head of Legal & Corporate Services Division, Encik Abd Aziz Abd Kadir.
Status quo for RCULS conversion. According to management, KLCC Holdings (KLCCH), the holdings company and development arm of Petronas, has not indicated when RM714m (RM717m if interest included) RCULS will be converted. To recap, conversion of 100% of RCULS enlarges share base by 39% to 1.29b shares. With no timeline, we believe share price performance will be capped.
However, management has reassured us KLCCH will strive to minimize dilution impact from RCULS conversion. Although no timeline was provided, we believe KLCCH will wait for stronger contributions upon Lot C’s full completion post 4QFY12. It is timely as revision of long-term leases is due for Petronas Twin Towers (PTT) post 3QCY12 and Menara Maxis post 2QCY13.
Lot C progress completion at level 13-14 out of total 60 levels. Expected completion for the retail podium is in 3QFY11 while office portion in
4QFY12;
No new information on asset injection. Timeline and potential investment properties were not disclosed. Management mentioned any asset injection must not be yield dilutive to the KLCCP portfolio. But we still think assets like Alamanda Mall @ Putrajaya are likely candidates because 1) Suria
KLCC already manages the mall 2) high occupancy rates.
Lot D1 plans not concrete yet. Initially, the site was earmarked for service residences. However, KLCCP stated plans still fluid and is dependent on
market demand. We think firmer plans likely made known closer to completion of Lot C as more cash-flow will be available for Lot D1 developments.
Tunnel link between Lot C and Lot D1 on the way. The tenders have been recently awarded (main contractors are Daewoo) with estimated March 2011 completion. Contract size is >RM30m.
Portfolio updates
Dayabumi
Mandarin Oriental (MO)
No changes to FY10-11E net profit of RM237m (+4% YoY) - RM252m (+6% YoY), until further guidance given for Dayabumi lease renewals.
Maintain HO LD with unchanged fair value of RM3.44, based on SOP RNAV. KLCCP share price will remain capped in the short to medium term because of uncertainty in RCULS conversion timeline, causing dividend dilution. However, downside risk is minimal as rental rates and quasi recurring income from MO and Suria KLCC should strengthen inline with economic recovery. Strong earnings re -rating likely post FY12 from Lot C contributions and long-term lease renewals from PTT and Maxis. At current share price, the s tock is fairly valued at 1) 16.7 x FY31Mar11E FD PER vs.
15.7x historical average 2) 0.9x FD PBV vs. with 0.8x historical average.
We met with KLCC Property Holdings’ (KLCCP) new Head of Finance & Accounts Division, Encik Azmi Yahaya, and Head of Legal & Corporate Services Division, Encik Abd Aziz Abd Kadir.
- Status quo for RCULS conversion. According to management, KLCC Holdings (KLCCH), the parent company and development arm of Petronas, has not indicated when RM714m (RM717m if interest included) RCULS will be converted. However, management has reassured us KLCCH will strive to minimize dilution impact from RCULS conversion. Although no timeline was provided, we believe KLCCH will wait for stronger contributions (Lot C, Petronas Twin Towers long term lease renewals).
- Lot C progress completion at level 13-14 out of total 60 levels. Expected completion for the retail p odium is in 3QFY11 while office portion in 4QFY12. Retail tenant mix has not been decided yet, whilst management is eyeing multinationals as tenants for office portion.
- Mandarin Oriental 9M10 occupancy rates was down to 53% (ARR: RM650) from FY09’s 66% as a result of the recent global economic downturn; since it targets business travellers, occupancy rates fell as the segment were downgrading to 4 star hotels. Nonetheless, the hotel remains profitable at 17.4% pretax margin at 31/12/09. Management has indicated improved occupancy rates in Jan-Feb 2010, although quantum was not made known. Refurbishments expected in FY11 with 3 -4 year duration.
- Lot D1 plans not concrete yet. Management stated plans are still fluid and is dependent on market demand. Meanwhile, tunnel link between Lot C and Lot D1 on the way with estimated March 2011 completion. There were no new information on potential asset injection and timeline.
- No changes to FY10-11E net profit of RM237m (+4% YoY) - RM252m (+6% YoY). (See below for more project updates).
- Maintain HOLD with unchanged fair value of RM3.44, based on SOP RNAV. KLCCP share price will remain capped in the short to medium term because of uncertainty in RCULS conversion timeline, causing dividend dilution. However, downside risk minimal as rental rates and quasi recurring income from MO and Suria KLCC should strengthen inline with economic recovery. Strong earnings re-rating likely post FY12 from Lot C contributions and long-term lease renewals from PTT and Maxis. At current share price, the stock is fairly valued at 1) 16.7x FY31Mar11E FD PER vs. 15.7x historical average 2) 0.9x FD PBV vs. with 0.8x historical average.
Key Points
We attended an informal Q&A session with KLCC Property Holdings’ (KLCCP) new Head of Finance & Accounts Division, Encik Azmi Yahaya, and Head of Legal & Corporate Services Division, Encik Abd Aziz Abd Kadir.
Status quo for RCULS conversion. According to management, KLCC Holdings (KLCCH), the holdings company and development arm of Petronas, has not indicated when RM714m (RM717m if interest included) RCULS will be converted. To recap, conversion of 100% of RCULS enlarges share base by 39% to 1.29b shares. With no timeline, we believe share price performance will be capped.
However, management has reassured us KLCCH will strive to minimize dilution impact from RCULS conversion. Although no timeline was provided, we believe KLCCH will wait for stronger contributions upon Lot C’s full completion post 4QFY12. It is timely as revision of long-term leases is due for Petronas Twin Towers (PTT) post 3QCY12 and Menara Maxis post 2QCY13.
Lot C progress completion at level 13-14 out of total 60 levels. Expected completion for the retail podium is in 3QFY11 while office portion in
4QFY12;
- Tenant mix for retail has yet to be decided but management highlighted they are trying to bring in new luxury brands which have yet to come to Malaysia; previously, we were guided the retail portion will feature luxury jewelry/watch segments. Nonetheless, suitors will be plenty given iconic status of Suria KLCC. KLCCP will strive to get 3 year leases, similar to Suria KLCC, to ensure stability in mall’s contribution.
- Likely to sign-up multinationals for offices on a long-term lease basis (likely similar lease duration to PTT). Identities of potential candidate(s) likely to be released closer to completion of the office portion. We also have no indication if it will be single or multiple tenants.
No new information on asset injection. Timeline and potential investment properties were not disclosed. Management mentioned any asset injection must not be yield dilutive to the KLCCP portfolio. But we still think assets like Alamanda Mall @ Putrajaya are likely candidates because 1) Suria
KLCC already manages the mall 2) high occupancy rates.
Lot D1 plans not concrete yet. Initially, the site was earmarked for service residences. However, KLCCP stated plans still fluid and is dependent on
market demand. We think firmer plans likely made known closer to completion of Lot C as more cash-flow will be available for Lot D1 developments.
Tunnel link between Lot C and Lot D1 on the way. The tenders have been recently awarded (main contractors are Daewoo) with estimated March 2011 completion. Contract size is >RM30m.
Portfolio updates
Dayabumi
- MISC, the anchor tenant , is up for lease renewals in June 2010. Likelihood is high for MISC to renew and KLCCP will be seeking for a new 3-year lease term. MISC makes-up c.80% of occupied space.
- Refurbishments are in the pipeline as Dayabumi is a 26 year old building, but in a gradual manner; CAPEX amount has yet to be decided. Upgrading the building will help rerate rental rates.
Mandarin Oriental (MO)
- 9M10 occupancy rates was down to 53% from FY09’s 66% as a result of the recent global economic downtu rn; MO targets business travelers resulting in occupancy rates declining as the segment were downgrading to 4 star hotels. Nonetheless, MO remains profitable at 17.4% pretax margin at 31/12/09. KLCCP has always made it a point to maintain or increase ARR (RM650 for 9M10 or +3% in FY09) since it is much tougher and longer to step-up ARR, preventing them from capitalizing during a market upswing. Management indicated improved occupancy rates in Jan -Feb 2010, although quantum was not made known.
- Refurbishments to take place in FY11 with 3-4 year duration. Previously, KLCCP had guided up to RM170m in CAPEX, which could be higher going forward.
No changes to FY10-11E net profit of RM237m (+4% YoY) - RM252m (+6% YoY), until further guidance given for Dayabumi lease renewals.
Maintain HO LD with unchanged fair value of RM3.44, based on SOP RNAV. KLCCP share price will remain capped in the short to medium term because of uncertainty in RCULS conversion timeline, causing dividend dilution. However, downside risk is minimal as rental rates and quasi recurring income from MO and Suria KLCC should strengthen inline with economic recovery. Strong earnings re -rating likely post FY12 from Lot C contributions and long-term lease renewals from PTT and Maxis. At current share price, the s tock is fairly valued at 1) 16.7 x FY31Mar11E FD PER vs.
15.7x historical average 2) 0.9x FD PBV vs. with 0.8x historical average.
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