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Monday, May 28, 2012

KLCC Property Holdings (RM3.47; TP: RM5.62): After Krisassets, KLCCP next to become REIT?

Want to own the hottest property in town and probably achieve more than 50% return over the next 1 year or so? Look no further than KLCC Property Holdings Bhd (KLCCP). This is something worth looking into. It is also one of the safest investments that you could put your money into. In the words of the CEO, KLCCP is like a government securities type of investment, you are guaranteed dividends no matter what happens. 

The major catalyst for rerating of this stock will depend on whether REIT-ing the company's property assets is on the cards.  According to Maybank report, the management is mulling over REIT option. Kenanga mentioned that REIT is an eventuality according to management, but Kenanga opined it may not be so soon and should accumulate the shares only in 2013 (Which is another half a year's time, quite soon I think). When will it be implemented? I don't know. But it seems that this is the most logical way to unlock the deep-seated value present in this company and I hope that this will be implemented soon. It also could be a major windfall gain for major shareholders such as Petronas and EPF which hold 52.6% and 10.3% stake respectively.  Will they be clamoring for it? Just look at how Krisassets' share price almost doubled from RM4.00 to RM7.70 over the past 6 months and the announcement of REIT only occurred in April 2012. 


Comparison with Krisassets:
If Krisassets, which has "The Gardens" and "Midvalley" worth RM4.6bil, currently has market capital of RM3.4bil, shouldn't the market cap of KLCCP having properties worth a massive RM9bil rise from a paltry RM3.2bil currently to more than RM6bil - if REIT comes into the picture? In addition, KLCCP's property portfolio is superior and more diversified as compared to Krisassets IMO.


Valuation: Huge prospects of share upside if KLCCP is a REIT
One of the benefits of REIT is the exemption of taxes if 90% of the taxable income is distributed to unit holders. Currently, KLCCP is paying approximately RM180mil worth of taxes every year and its net income could be in the range of RM350-400mil. Without the taxes, net income could be around RM500mil. Let us just apply the ratios of M-REITs to KLCCP: 


Assumptions: 
Net Profit: RM500mil (If tax-free status for REIT)
Book Value: RM7.2bil
Dividend payout: 100%


Malaysian REITS average ratios:
  1. PBV: 1.0x
  2. PER: 14x
  3. Dividend yield: 6.6%
Therefore, KLCCP should have market cap as follows:
  1. Based on PBV: RM7.2bil
  2. Based on PER: RM7.0bil
  3. Based on dividend yield: RM7.6bil
Average: RM7.27bil or RM5.62 per share (Fully diluted)


The valuation above is of course a simplified version, just to show the extent of how undervalued KLCCP is. Possible acquisition of the remaining stakes in the properties such as Petronas Twin Towers, Suria KLCC and Menara Maxis as a result of REIT in addition to the additional profits attributable to shareholders as a result of these acquisitions are not accounted for yet. I'll let the investment bankers do the number crunching.


Remains undervalued even without REIT in the picture....yet.
Even if leaving REIT out of the picture, KLCCP by itself is undervalued in my opinion, reason being KLCCP has superior property assets which could ride through most storms and its earnings are solid with stable earnings growth going forward.  It is a branded name (名牌货). This kind of company should be trading at PER of 15x. By incorporating PER of 15x to its earnings of RM380mil for 2013 (it's already making about RM90mil recurring net profit for 1Q12), market cap should be at least RM5.7bil, or RM4.40 per share (Fully diluted). 


Share price upside will also be underpinned by earnings upside coming from its newly completed Petronas Tower 3, also known as Menara Carigali, contributing about RM100mil p.a starting this year. The master lessee is Petronas with a commitment of 15-year lease. In addition, earnings growth will also come from upward revision of rental rates for Petronas Twin Towers in Sept 2012 (possibly from current RM9.11psf to RM13 psf - 30-40% increase!) coupled with Menara Maxis lease renewal by May'13.


Conclusion:
Therefore, KLCCP is worth investing based on its very stable earnings (Recession proof, owned by Petronas and EPF, very solid and famous property assets), earnings growth (Petronas Tower 3, Suria KLCC extension, Dayabumi renovation, lease renewals of Twin Towers and Menara Maxis), reasonable valuation (PBV  around 0.6x, PER of 11x) and most importantly, the REIT prospects (Market cap should be more reflective of the book value of RM7.2bil). Just look at IGB or SP Setia, of which both of them have market cap of RM4bil and RM7bil coupled with PBV of 1.1x and 1.9x  respectively. Their PER is 19x!!! I don't think KLCCP could stay at this level for long. 


Happy investing!




Market Data: 
Share Price: RM3.47
Shares capital: 934.1mil
Enlarged shares cap (incl. RCULS): 1,294.7mil
Market Cap: RM3.4bil
Net Debt: RM1.64bil
Net Gearing: 0.21x
PBV: 0.44x (Basic); 0.6x (FD)
PER'12 and '13 (assuming NP of RM340mil-380mil for 2012-13): 9.6x and 8.6x (Basic);12.7x and 11.4x (FD); 
Div Yield: 3.3%
Main shareholders: Petronas (52.6%) and EPF (10.3%)

Company Profile:
KLCC Property Holdings Bhd is involved in property investment, facility management, car park operation management, and hotel services. The company has a diversified property portfolio consist of the following:

Commercial Properties:
Petronas Twin Towers (KLCCP: 51%; Petronas: 49%)         
Description: 88-storey office building 
Built-up area: 510,901 sq. m.
Market value: RM6.6bil
Stake value: RM3.4bil
           
Menara Maxis (KLCCP: 33%; Tanjong: 67%)
Description: 49-storey office building
Built-up area: 74,874 sq.m.
Market value: RM672mil
Stake value: RM222mil

Menara ExxonMobil (100% stake)
Description: 29-storey office building
Built-up area: 74,312.7 sq.m.
Market value: RM445mil
Stake value: RM445mil

Menara Dayabumi (100% stake)
Description: 36-storey office building
Built-up area: 162,488 sq.m.
Market value: RM421mil
Stake value: RM421mil

Petronas Tower 3 (100% stake)
Description: 59-storey office building and 6-storey retail
Built-up area:  78,000 sq.m. office and 13,000 sq.m. retail
Market value: RM1.57bil
Stake value: RM1.57bil      

Hotel:
Mandarin Oriental (KLCCP: 75% stake; Mandarin Oriental Asia Ltd: 25%)
Description: Hotel rooms and service apartments
Built-up area: 92,782.8 sq.m.
Market value: RM321.5mil
Stake value: RM241mil

Retail:
Suria KLCC (KLCCP: 60%; CBRE Global Investors: 40%)
Description: 6-storey retail
Built-up area: 143,564 sq.m.
Market value: RM4.06bil
Stake value: RM2.44bil

Vacant Land:
Land area: 5,726 sq.m.
Net book value: RM213.7mil


Total market value of properties belonging to KLCCP: RM8.95bil 

3 comments:

  1. Too bad, after its rally recently...they said it is not the right time to convert to REIT yet... http://biz.thestar.com.my/news/story.asp?file=/2012/6/7/business/11430467&sec=business

    ReplyDelete
  2. Ya, and the news is based entirely on CIMB report alone. Having said that, even without the REIT, this is a good investment in the current market environment as it's a very safe haven. PER 11-12x or PBV of 0.6x for this kinda company? A bit on the low side don't you think?

    ReplyDelete
  3. wow - having a look - now this stock is 4.31......well done david on your analysis! :)

    ReplyDelete