We maintain our HOLD rating on KLCC with a lower SOTP-derived price target of RM7.55 after incorporating our revised earnings forecasts, higher long-term growth assumption and higher cost of equity. KLCC’s parent company is developing 3 major projects around KLCC Park, scheduled for completion between 2020-22. We estimate these projects to have a combined GDV of RM10bn. These projects are likely candidates for injection into KLCC and we estimate the injection of every RM1bn of assets lifts KLCC’s fair value by 11-25 sen. At 5.2% 2019E yield, KLCC’s valuation looks fair.

Hive of New Development Around KLCC Park

KLCC’s parent company, KLCC (Holding) Sdn Bhd (KLCCH) is developing three new integrated commercial projects around KLCC Park, partnering with local and foreign companies. These projects (office tower, hotel, retail podium) are located next to KLCC’s existing assets, and are under various development stages with target completion in 2020-22.

KLCC Has First Right of Refusal

KLCC has first right of refusal for any projects developed by KLCCH. The new developments are, in our view, likely candidates for asset injection. While there are various considerations / hurdles to overcome, ie, pricing, ownership structure, tenancy portfolio, a successful asset injection, if materialised, should lift KLCC’s earnings and fair value. We estimate that injection of RM1bn of assets should lift KLCC’s fair value by 11-25 sen, assuming 6-7% asset yield, 4.8% finance cost and 2.5% long-term growth.

Tweaking Down 2018-20E EPS by 1-6%

We lowered our 2018-20E EPS forecasts by 1-6% after revising our forecasts for its triple net leases using the straight-line method, as per KLCC”s accounting practise. We made minimal changes to our DPS forecasts, which we base on cash flow projections rather than reported EPS. Despite the EPS cut, KLCC’s earnings outlook remains stable.

Maintain HOLD With a Lower TP of RM7.55

We revised our SOTP-derived target price to RM7.55 (from RM7.78) after incorporating our new earnings forecasts, higher long-term growth rate of 2.5% (from 2.0%) and higher cost of equity of 7.9% (from 7.6%) to account for the earnings growth potential from asset injections and higher associated risks. Maintain HOLD. At 5.2% 2019E yield, valuation is within its historical trading range and looks fair.

Source: Affin Hwang Research - 26 Jun 2018