Highlights

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

Menara Dayabumi updates. We understand KLCC has secured an anchor tenant for Phase 3 but did not reveal the identity of the party, and will be seeking to secure a triple net lease (TNL) agreement.

Lot D1 updates. We understand KLCC is in advanced stages of negotiations to secure an anchor tenant, and we believe development may commence by as early as 4Q 2014 and complete in circa 2018.

Incoming pipeline is all internal. In terms of third party acquisitions, management does not appear to be close to striking any deal and we opine it will be unlikely to take place this year, due to scarcity of available retail assets in the market place.

Office market outlook. Management concedes the market for office space in Klang Valley remains soft, but believes it remains well shielded thanks to TNL for its assets, apart from Menara Exxon Mobil.

Insulated from future cost pressures. We also learnt that the TNL renders KLCC largely immune to the upcoming hikes in DBKL assessment rates and electricity tariffs, which are fully borne by individual tenants. Management believes that the hike is likely to be in the region of 200-300%.

Risks

Potential holding company discount for the stapled security.

Forecasts

FY14-16 forecasts reduced by 24% following guidance from management, as our previous FY14-16 forecasts were too high vs. consensus as well as management guidance.

Rating

HOLD

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

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

Valuation

We maintain our target yield at 6.0%, but reduce our TP from RM6.52 to RM6.28 to reflect our change in profit and DPSS estimates.

We still believe the recent decline in share price has been overdone, and recommend BUY.

Source: Hong Leong Investment Bank Research- 27 Jan 2014