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)

KENANGA: KLCC Property Holdings - Gearing up to lower interest cost

KLCC Property Holdings - Gearing up to lower interest cost (Company Update)



Price: RM2.86

Target Price: RM4.37

Recommendation: BUY



· RM420m new credit facilities... KLCC Property Holdings (KLCCP), via its 75% owned subsidiary Asas Klasik Sdn Bhd (AKSB) or the owner of Mandarin Oriental (MO), entered into an agreement to get up to RM420m credit facilities from Public Bank. This is in line with management's earlier guidance to refinance up to RM1b of existing loans in the next 3 years.

· ...to facilitate on-going KLCC developments. The additional gearing will be used to facilitate the working capital requirements of Lot C and the underground tunnel linking Lot C to Lot D1 in the KLCC Development area. Typically, KLCCP's projects are financed on a 3:2 debt-equity ratio.

· Increased gearing but lower future interest expense! FY08E and FY09E gearing of 32.5% respectively, has increased to 34.9% and 35.6%, respectively. However, via re-financing management expects up to 47% savings in future finance cost due to lower interest rates, which is not surprising given the strong credit rating and fundamentals of KLCCP. Recall that KLCCP re-financed some RM400m loans relating to Suria KLCC at lower interest rates.

· Maintaining FY08E net profit of RM660m and tweaking FY09E net profit lower by 2% to RM242m, respectively, to account for higher gearing and lowered effective interest rates.

· Unchanged target price of RM4.37. Fantastic buying opportunity given the recent sell-down in KLCCP, 53% premium to its last trading price while FY08E and FY09E PER are undemanding at 4x and 10x, respectively. Maintain BUY.





KENANGA INVESTMENT BANK BERHAD (15678-H)

Research Department

KLCC Property - Outperforming expectations again

KLCC Property - Outperforming expectations again (Results Note)
Price: RM3.26
Target Price: RM4.37
Recommendation: BUY


· 9M08 net profit of RM177m was above expectations and accounted for 86% and 82% of our and street FY08E net profit forecast. KLCC Property (KLCCP) sterling results are attributed to increased rental of office rental building, especially for Petronas Twin Towers (PTT) which had its triple-net rental revision of 27% this financial year.

· YoY, 9M08 pretax profit grew 22%, on the back of increased revenue from Suria KLCC (Suria) due to higher rental rates while maintaining high occupancies. Another contributing factor is lower interest expense by 8% due to total borrowings decreasing by 7% to RM2.1b.

· 3Q08 net profit fell 28% YoY to RM52m. This was largely due to lower average room rates and occupancy for Mandarin Oriental for 3Q08. Also contributing to the decline is lower pretax profit from its management services which dropped 12% to RM4.6m.

· Upward revision of 220% in FY08E net profit forecast to RM660m to account for c.RM427m revaluation gains from KLCCP investment properties (FRS 140). Our revision also includes a 13% increase in FY08E recurring net profit to RM233m relating to Suria KLCC higher rental rates.

· Unchanged target price of RM4.37, based on our conservative sum of parts RNAV (assuming 50% dilution of RCULS), which is a 34% upside to its trading price. FY08E and FY09E PER is fair at 5x and 13x, respectively. Maintain BUY recommendation.



KENANGA INVESTMENT BANK BERHAD (15678-H)

Research Department