We attended KLCC Stapled Group (KLCCSS) briefing and came away feeling slightly more positive. There is now more clarity on the impact from the property assessment and utilities hikes where KLCCSS will be relatively unscathed, thanks to the triple-net-lease (TNL) arrangements on most of their office assets and ability to pass-on-costs for other assets due to its prime asset positioning, i.e. minimal earnings risks to the group. While management is still keen on the REIT-ing of Complex Dayabumi and Suria, there is no definite timeline as yet. Currently, the group is concentrating on extensive AEI works for Dayabumi, including redevelopment of Citypoint, which would add on 0.5m sf NLA by 2017. Lot D1 developments are still at planning stages as the group needs to secure an anchor tenant first. No changes to estimates. We upgrade KLCCSS to MARKET PERFORM and TP to RM5.86 (from UNDERPERFORM and TP of RM5.41).

Safe from property assessment and utilities hike. We are comforted that KLCCSS assets are mostly on a triple net lease (TNL) basis where the tenancy agreements require tenants to bear property costs, so additional hikes in property assessment and utilities (e.g. electricity) hikes will be borne by the tenants. The assets that do not have automatic cost-pass-through mechanisms under TNL are (i) Exxon Mobil where it has a hybrid-TNL lease, although we do understand there will be a rental reversion in Feb-14 where higher property costs (e.g. electricity, assessment) will be passed on to the tenants, (ii) Suria KLCC where the higher costs will be passed on via higher service charges, (iii) Dayabumi (3% of revenue) is currently not on TNL, but management is working towards that. Thus, the group will remain relatively unscathed by the hikes in property assessment and utilities hikes.

Looking to inject Dayabumi and Suria, but there is no definitive timeline for an injection to take place. Dayabumi’s redevelopment would first have to be completed before it can be REIT-ed. As for Suria, management is actively negotiating although management does not commit to a timeline or offer further details on the depth of their negotiations. We believe REIT-ing of Suria will be difficult at this juncture given the low cap rate environment.

Concentrating on redevelopment of Dayabumi. Complex Dayabumi is currently undergoing refurbishment for existing areas and to add additional NLA to the group’s portfolio. Phase 1 & 2 works include a new corporate lobby and renovation of retail spaces and common areas. Phase 3 of the refurbishment involves redevelopment of Citypoint podium (additional 0.5m sf NLA of office and retail) while the group is in talks to secure an anchor tenant for the space. No CAPEX guidance has been provided until talks are finalized. Redevelopment works are expected to begin in 2015 with slated completion in 2017. We do not expect any significant loss of income from Citypoint, when it has been demolished to make way for the new development, as its current income contribution is not substantial.

Upgrade to MARKET PERFORM based on higher TP of RM5.86 (from UNDERPERFORM and previous TP of RM5.41). Previously, we had imputed valuations risk to KLCCSS due to the threats of property assessment hikes by increasing our yield spreads to the 10-year MGS by +0.5ppt to +2.3ppt (back in our 2-Dec-2013 Sector Update). However, since the threats are minimal at this juncture, we have excluded this valuation risk and thus, reduce our yield spreads to the 10-year MGS by 0.5ppt to +1.8ppt. Thus, the increase in our TP to RM5.86, from RM5.41, based on 5.4% net yield spread (5.8% previously). At current levels, the stock provides net yields 5.5%, and a total return of 9.1%.

Source: Kenanga