• D/G to NEUTRAL from Buy, new MYR7.27 TP from MYR7.57, 7% upside and c.6% yield. We believe the proposed 5-10% High Value Goods Tax is a negative to KLCCP as its flagship mall, Suria KLCC, is known to cater to shoppers in the middle-to-upper income bracket. We tweak our cost of equity higher to 7.3% from 7.1% to account for the increased uncertainty and negative sentiment surrounding the proposed tax.

• New High Value Goods Tax. Prime Minister Dato’ Seri Anwar Ibrahim said the Government will enact new legislation to place a 5-10% tax on certain high-value goods, which will be based on the threshold value of such items. While we need to wait for more details, the Prime Minister cited goods such as jewellery and watches as examples in his Budget 2024 speech. Previously in the tabling of Budget 2023 in February, the Prime Minister also cited fashion goods as another example.

• Foreign tourists exempted. We think the tax exemption for foreign tourists – to not inhibit the recovery of the tourism industry – provides a relief. On that front, the Government is reinstating Visit Malaysia Year to 2026 with a target of 26.1m foreign tourist arrivals, equalling the arrivals in 2019. We think this highlights the more gradual nature of the tourism recovery.

• Impact to sales. Some spending may be brought forward before the implementation of this tax, especially in the seasonally stronger 4Q, but longer-term tenant sales will likely be affected. Suria KLCC’s occupancy rate has increased to 96% in 1Q23 after dropping to 92% in 2022, but we think sentiment will be hit until there is more clarity on the impact to tenants’ earnings. In 1H23, the retail segment contributed 33% of KLCCP’s total revenue.

• Potential re-rating catalyst. To date, Mandarin Oriental Hotel continues to be loss-making (1H23 PBT: -MYR4.9m) with occupancy at c.40% in 2Q23, but the RevPar has remained high at MYR440, which should support the recovery in 4Q23. Any news on acquisitions could be a potential re-rating catalyst. KLCCP’s gearing ratio is only at 18%, and management guided that they are open to acquire properties outside of Malaysia depending on the opportunity.

• Conclusion. We make some housekeeping changes to our earnings forecast. Our DDM-derived TP (Ke: 7.3%) includes a 4% ESG premium based on a 3.2 ESG score. Risks include faster/slower-than-expected tourism industry recovery and higher/lower-than-expected rental reversion and/or occupancy rates.

Source: RHB Securities Research - 16 Oct 2023