Highlights

We attended an analyst briefing hosted by management and came away with the following updates:

Dividend forecast on track. Management guides for 27.4 sen DPSS for FY13, which is right in line with our 28.0 sen DPSS forecast. This translates into 4.3% DY for FY13E.

Near term dividend challenges. We understand KLCC has set aside RM80m for major capex such as Phase 2 of Menara Dayabumi refurbishment and asset enhancement for Mandarin Oriental and ExxonMobil as well.

Dayabumi Phase 3 (DP3) updates. KLCC has secured an operator for the 500-room hotel, but the search for an office space anchor tenant continues. Should this happen, we gather that the earliest date for development would be 2Q 2014. Dayabumi currently fetches the lowest rental rate in KLCC’s stable (RM5 psf vs. RM7-9 psf for the rest), and this major upgrade would serve to boost rental income and make its injection into KLCC REIT a possibility.

Lot D1 updates. Similar to Menara 3 and DP3, KLCC will only proceed with construction if it secures an anchor tenant, potentially a player in the oil & gas sector. Management is guiding for this to happen by end 2014 earliest, but we think this would be challenging given the soft office market in KL.

Risks

Potential holding company discount for the stapled security.

Forecasts

Following clarification with management over the new MI structure of the Stapled Securities, FY13-15E earnings raised by 39-49% to account for MI and tax savings

Rating

HOLD

Positives: (1) High occupancy rates (>90%), consistently strong human traffic and desirable tenant profile due to prestigious and desirable KLCC address; (2) Stability of rental yield and scope for capital appreciation; and (3) Confirmed announcement of the stapled securities.

Negatives: Lower than expected dividend payout; performance drag from the hotel segment.

Valuation

We now roll forward our valuation on KLCC based on FY14E DY. We believe a 5.5% target DY is appropriate as this is inline with Pavilion REIT, which also manages up-market retail and commercial assets. Our TP is raised from RM5.60 to RM6.28. HOLD

Source: Hong Leong Investment Bank Research - 4 Sep 2013