KLCC Stapled Group 
(May 6, RM7.13)
Maintain market perform with unchanged target price (TP) of RM7.06: The KLCC Stapled Group’s three months of financial year ending Dec 31, 2015 (3MFY15), realised distributable income (RDI) of RM160 million came in within expectations, making up 22.6% of consensus and 23.3% of our full-year estimates. 

First quarter of FY15 (1QFY15) gross dividend per share (GDPS) of 8.34 sen (3.02 sen single-tier dividend plus 5.32 sen subject to 10% withholding tax), implies a net dividend per share (DPS) of 7.81 sen, which makes up 23% of our FY15E (estimate) net dividend per share (NDPS) of 33.9 sen (4.8% yield).

Quarter-on-quarter (q-o-q) top line declined by 6% to RM327 million mainly due to: (i) hotel segment (down 32%) from weak demand from ongoing renovations, while plunging oil prices affected the oil and gas sector, which is a main business driver; (ii) management services segment (-13%); and (iii) office segment (-1%) due to the closure of City Point, Kompleks Dayabumi. 

Improving earnings before interest, taxes, depreciation and amortisation margins by 3.4 percentage points (ppt) to 78.3%, and higher interest income (+15%) were not sufficient to negate the declining top line. As a result, the RDI declined by 9% to RM160 million.

Year-to-date, year-on-year top line was down by 4% primarily on: (i) hotel segment (-36%) due to similar reasons mentioned above; (ii) office segment (-1%) due to the closure of City Point, Kompleks Dayabumi; and (iii) retail segment (-2%) down slightly from a one-off back charging of percentage rent by Suria KLCC Sdn Bhd in 1QFY14. Profit before tax margins thinned slightly by 0.8ppt to 70.6% on higher operating cost, causing the RDI to fall by 3% to RM160 million.

The group recently renewed its shareholders’ approval during the annual general meeting on April 16, 2015, for up to 10% placement, which should raise funds of between RM1.1 billion and RM1.2 billion. It was mentioned in the media that the funds will be used for potential asset acquisitions within Kuala Lumpur’s Golden Triangle. 

Potential assets are: (i) the remaining stake in Suria KLCC not owned (only 60% owned); (ii) assets under the parent (KLCC Convention Centre, Traders Hotel and Impiana Hotel); and (iii) third-party assets within the Golden Triangle.

Going forward, management indicates that it is still on the lookout for potential assets, but so far nothing concrete has materialised as yet. We reckon the stock will be rerated once there is more news flow on target acquisitions. We make no changes to earnings. 

We maintain TP of RM7.06 based on an unchanged target gross/net yield of 5.1%/4.8% on average FY15 GDPS/NDPS of 33.9 sen/34.9 sen on a +1.2ppt to our 10-year Malaysian government securities target of 3.9%. 

We see limited upside at this juncture considering that its current FY15 (estimate) net yield of 4.8% is already slightly lower than sizeable Malaysian real estate investment trust peers’ average of 5%, while most positives have already been priced in. — Kenanga Research, May 6

This article first appeared in The Edge Financial Daily, on May 7, 2015.