· In the limelight? It was reported that SAPRES may be selling its remaining 49% stake in APIIT to Ekuinas. SAPRES responded by saying that they are ‘constantly evaluating its business operations and future plans with a view to enhance value to the group’. Recall that APIIT was 100% owned by SAPRES until they sold a 51% stake to Ontime S/B (indirect subsidiary of Ekuinas) in 2010 for RM102m at implied FY10-11E PERs of 11.4x-8.2x. SAPRES then paid out a special dividend of 9.35 sen in FY12. Separately, a 50:50 JV with KLCC (H) S/B to develop the Jln Kia Peng land into an integrated development was then announced in Jul-11, and their consideration was RM108.5m. However, the KLCC JV deal was only concluded in Oct-14 and the Group paid out another 15.31 sen in FY14; this brings FY11-14 cumulative special dividend payout to 23% of the disposal amount.

· The KLCC JV involves the development of 1.88ac commercial freehold land along Jln Kia Peng into an office tower, retail podium and convention centre of a total GFA of 1.19m sf and 1,270 carpark bays (basement) of GDC RM1.5b. SAPRES will be in charge of leasing out 70% of the office tower as their income (on 15-year lease term, fixed step-ups) while KLCCH will lease out the remaining space. The initial lease terms will only be determined closer to completion; indicatively, it was guided that the project can generate rental income of RM150m p.a. assuming 100% occupancy.

· Future earnings contributions will be driven by the KLCC JV. Currently, SAPRES’ earnings are mostly driven by APIIT, which has been more than sufficient to cover losses arising from its Aviation and Corporate Services segments. Hence, the sale of APIIT will result in the loss of a significant earnings driver. Thanks to the KLCC JV, the group should be able to see c.RM21m pretax profit p.a. from its 50% ownership in the Jln Kia Peng development (90% occupancy upon completion in 2019/20) vs. APIIT’s pretax earnings of RM20m p.a. (2-year historical average) currently.

· Financing in place. The KLCC JV has secured up to RM1.08b financing which will finance up to 80% of the project’s cost (construction/land). If the loan is fully drawn down and assuming associate accounting for the debt, their net gearing will hit 1.3-1.4x in 4-5 years’ time (current: 0.3x). This is not a major concern as the said project’s recurring EBIT provides c.1.7x interest coverage; but we do qualify that such net gearing level will limit its future growth expansion plans. In the meantime, it does lend strength to the argument that the group can afford to pay out some special dividends if the remaining APIIT stake is sold.

· An opportune time to exit APIIT. Tertiary education based players like SEGI are trading at 25x Fwd PER while publishers like SASBADI are at 16x Fwd PER implying that the former is trading at >50% premium over the latter’s valuations. Based on SASBADI’s IPO PER of 9.8x and assuming a 50% premium for tertiary players, we ascribe a Fwd PER of 15x on APIIT which values SAPRES stake at RM294m vs. SAPRES current market cap of RM226m. Assuming a similar 20% payout of the disposal of APIIT, as mentioned earlier, this implies 42.1 sen special dividend potential.

· Risks. Expect some earnings weakness due to the financing costs arising from the KLCC JV project while its aviation and corporate services segments continue to be volatile. At this juncture, we think that the stock’s valuations are not highly dependent on its current earnings trajectory considering the change in future earnings drivers.

· FV of RM2.21 based on a 40% discount to our SoP. We are only valuing its profitable divisions i.e. (i) existing investment properties valued at 0.8x Fwd PBV, (ii) KLCC JV land value @ RM3500psf and ascribing a 20% discount due to weak property sentiment, (iii) APIIT at 15x Fwd PER. Our FV is still below its NTA/share of RM2.63 (2Q16) indicating that there are still unrealized values in the company. TRADING BUY.

Source: Kenanga Research - 16 Nov 2015