Highlights

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

Future asset injection. Phase 3 of Menara Dayabumi, which involves redeveloping Citypoint Podium into a mixed hotel/office development, is expected to commence development in 2015 and is expected to come on-stream in 2019. As for Lot D1, KLCC has yet to secure an anchor tenant, thus development is unlikely to commence in 4Q14 as guided previously.

90% DPU payout for 2015. KLCC remains committed to its promised 95% payout for 2014 (undertaken during its restructuring in the Stapled REIT), but will commit to only a 90% payout ratio from 2015 onwards. We make no changes to our future DPU assumptions as we have already factored this into our forecasts.

2014 DPU target on-track. KLCC issued RM1.55bn of Sukuk debt to refinance its existing debt. The refinancing exercise incurred a one-off cost of approximately RM24m, which largely explains the 7.8ppts decline in PBT margin in 2Q14. However, KLCC remains confident of meeting its 32.7 sen DPU target for 2014. We believe KLCC could even slightly exceed its DPU target given the strong performance of its portfolio assets. The office segment is currently 100% occupied and are all operating on triple net lease (TNL) basis except for Menrara Exxon Mobil. Suria KLCC mall is 93% occupied and sales activity of its retailers has not slowed down, as overall YTD sales turnover has grown a healthy 7.5% yoy. Mandarin Oriental is also enjoying stronger occupancy and room rates this year and is expected to see stronger earnings from the F&B and ballroom facilities after completing its refurbishment in 1Q14.

Minimal exposure to future rate hikes. Following the refinancing exercise, the fixed rate portion of its debt has increased to 85% in June (vs. 70% one year ago), which hedges KLCC against future potential rate hikes and will help to ensure stable dividend payout.

Risks

Potential holding company discount for the stapled security.

Forecasts

Maintained.

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) Largely shielded from higher utilities cost and assessment rates due to triple net lease agreements for its assets.

Negatives: Lacking in near-term catalysts .

Valuation

Maintain TP at RM6.28 (6.0% target yield).

Source:Hong Leong Investment Bank Research - 14 Aug 2014