KLCC Property - BUY - 16 May 2008

KLCC Property Holdings - Dampened by tax treatments (Results Note)



Price: RM3.10

Target Price: RM4.37

Recommendation: BUY



· FY08 net profit of RM442m came below expectations and is 33% and 31% less than ours and street forecast, respectively. However, FY08 PBT of RM904m was within both estimates. Net profit significantly varied because KLCC Property Holdings' (KLCCP) has just started conservatively incurring significant deferred tax provision for its annual fair value adjustments (FRS 112).

· YoY, FY08 recurring net profit grew over 100% to RM173m against FY07 recurring net loss of RM13m due to a reduction in deferred tax provisions by 76% to RM82m which stems from the 75% drop in revaluation gains to RM427m. Our YoY comparison uses re-stated FY07 figures as deferred tax provisions were not included previously. The original FY07 tax charge and net profit were 32x and 20% higher, respectively, compared to the re-stated figures.

· QoQ, 4Q08 pretax profit grew 369% to RM551m. Besides revaluation gains, KLCCP managed to achieve a stronger 4Q08 EBITDA margin of 80% compared to 4Q07's 77% (FY07: 75%; FY08: 78%). This is due to increased rental and room rates for Suria KLCC and Mandarin Oriental, as well as, Petronas Twin Towers who has its triple-net rental revision by 27% this financial year.

· 12.43sen for FY08E GDPS or a 4.0% dividend yield (FY07: 3.9%). KLCCP proposed a final gross dividend of 1.72sen subject to a taxation of 25% tax and a tax exempt 4.71sen in 4Q08 which brings total FY08 GDPS to 12.43sen. We believe that the flat dividends payout is in line with cash conservation for funding the on-going construction of Lot C.

· Maintaining FY09E net profit of RM233m. We are confident that KLCCP will meet our forecast because of strong occupancy rates, increasing rates on Suria KLCC and Mandarin Oriental. We will adjust our forecast for higher deferred tax provisions when management informs us of FY09's revaluation gains/loss in 3Q09.

· Unchanged target price of RM4.37, based on our conservative sum of parts RNAV (assuming 50% dilution of RCULS), which is a 41% upside to its trading price. FY09E and FY10E PER is fair at 12x and 11x, respectively. Maintain BUY recommendation.





KENANGA INVESTMENT BANK BERHAD (15678-H)