We attended KLCC’s FY14 results briefing which yielded no major updates or excitement. Operationally, MO’s occupancy is at 62.6% (from 65.0% in 1H14) due to refurbishment works, but ARR is higher YoY, while Suria’s occupancy is stable at 98% on 12% rental reversions. Lot D1 remains quiet as management is still trying to secure a tenant. The 10% placement mandate is still valid but there are no clear acquisition targets as yet. The group will concentrate on the redevelopment of City Point podium @ Dayabumi, which will start by 3Q15. No changes to earnings. Reiterate UNDERPERFORM with an unchanged TP of RM6.67. While we like the stock for its prime asset positioning, its FY15E net dividend yield of 4.9% is not as compelling vis-àvis its sizeable peers’ average of 5.4%.

Operationally sound. The retail segment, namely Suria KLCC, remains a strong performer, recording an average of 98.0% occupancy on 12.0% rental reversions and recorded 4.0% YoY PBT increase. Mandarin Oriental’s (MO) occupancy is slightly lower at 62.6% vs. 1H14’s occupancy of 65.0%, but ARR was up slightly YoY. MO has just completed the renovation of the ballrooms, and will be refurbishing the 2nd and 3rd floors which include meeting rooms, swimming pool area, spa and gym, with completion targeted by April-15. KLCC’s office segment, which contributes the most (43%) to the Group’s topline, is extremely stable as it has been constantly chalking close to 100.0% occupancy thanks to strong anchor tenants and long-term leases of 15 years. Menara Maxis’ 15-year lease was up in May-2014 and we gather than the anchor tenant intends to commit to another 15 years but have yet to sign the long-term lease agreement, resulting in flattish share of associates’ contribution. We have yet to build in the stepped-up rates until we get firmer indications from management. To recap, FY14 RDI met our expectations and thus, we make no changes to our earnings estimates. We also do not expect any significant earnings risk from KLCC due to its stable assets profile.

Phase 1 and 2 of Complex Dayabumi refurbishment completed, focussing on Phase 3. Management is currently looking at Phase 3, which involves the redevelopment of City Point podium which is expected to be demolished by 3Q15, while tenants have already been cleared. Management has yet to secure a tenant but is eyeing a TNL agreement for the asset. To recap, Phase 3 will comprise a 60- storey tower of mixed development, consisting of retail, office and hotel portion and we estimate that this may cost close to RM0.5b; it will likely be financed by their Sukuk Murabahah program. Management has indicated that they will not be providing guidance on CAPEX going forward due to sensitivity of contract pricings. For now, we are assuming RM50.0m for FY15E.

Placement mandate is still valid. The group still has the mandate for up to 10.0% placement, which will only be valid up to April-2015 or the next AGM. The placement is meant to raise funds of RM1.1b-RM1.2b for a potential asset acquisition and it may target assets within KL’s Golden Triangle (GT). Note that KLCCSS’ parent owns the KLCC Convention Centre, Traders Hotel and Impiana Hotel in the KL Golden Triangle. Of late, we are hearing that asset owners are becoming more realistic with asking prices, particularly with the overall economy facing several challenges. CMMT has also recently announced its acquisition of Tropicana City Mall. However, we reckon that acquisition of GT assets will be more challenging due to the prime positioning and location. Lot D1 which was earmarked by management to be a mixed development of office and retail space (GFA: 1.3m sf has yet to secure an anchor tenant). The development is still at the planning stage and management is still searching for a major anchor tenant as it will only proceed with development upon securing one.

Reiterate UNDERPERFORM with an unchanged TP of RM6.67 based on a target gross yield of 5.4% (net: 5.09%) on FY15E GDPS of 36.0 sen (NDPS: 33.9 sen). Our target gross yield is based on +1.20ppt spread (thinnest under our coverage) to our target 10-year MGS of 4.20%. While we like the stock for its prime asset positioning, its FY15E net dividend yield of 4.9% is not as compelling vis-àvis its sizeable peers’ average of 5.4%. 

Source: Kenanga