1Q14 net profit came in line with estimates. Earnings grew >100% y-o-y due  to  incremental  revenue  from  rental  reviews,  lower  expenses  and effective  tax  after  the  setting  up  of  KLCCSG.  The  stock’s share price has  performed  within  our  expectations  since  our  January  upgrade.  As the  positive  prospects  have  largely  been  priced  in,  we  downgrade KLCCSG to NEUTRAL (from Buy) with an MYR6.96 FV.

In  line.  KLCC  Stapled  Group’s  (KLCCSG)  MYR184.0m  1Q14  core  net profit  (+>100%  y-o-y;  +11.5%  q-o-q)  came  in  line  with  our  and consensus  estimates.  Revenue  grew  9.8%  y-o-y,  driven  by  incremental revenue  from  the  retail  and  hospitality  segments.  The  lower  minority interest charges  and tax  from  the  inception  of  KLCC  REIT  in  May  2013 also  lifted  the  bottomline.  An  8.71  sen  dividend  per  stapled  share  was declared for the quarter.

Business updates. From our recent meeting, we understand that Phase 2  of  Kompleks  Dayabumi’s  redevelopment  (KDR)  was  completed  in February.  While  currently  waiting  for  new  tenants  to  occupy  the  retail space,  management  is  confident  that  the  area  should  be  fully  occupied by  year-end.  KDR  Phase  1  is  on  track  for  full  completion  by  October. Phase 3 is due to start in 2015, and should see the demolishment of the Citypoint  building.  Some  hotel  and  office  blocks  should  then  be  put  up. 
Management  also  indicated  that  parent  company  KLCC  Holdings (KLCCH)  could  potentially  develop  some  new  offices  within  the  Kuala Lumpur  city  centre,  as  it  still  owns  several  parcels  of  undeveloped landbank in the area. Despite the oversupply of office space in the Kuala Lumpur market, KLCCSG’ major shareholder and master lessee of some existing  properties,  Petronas,  is  likely  to  need  more  office  space  going forward  to  cater  for  its  growing  workforce  as  it  continues  to  expand aggressively.

Downgrade to NEUTRAL. We reiterate our view that KLCC SG should continue to  record  decent  growth  from  both  its  property  investment  and development  segments.  Nonetheless,  given  that  the  stock  price  has rallied by 14% since our last upgrade report in January, we believe that the  stock  is  now  fully  valued.  Due  to  limited  upside  potential  from  the current  share  price,  we  downgrade  our  call  on  KLCCSG  to  NEUTRAL (from Buy), although our SOP-based FV is unchanged at MYR6.96.

 Effective  tax  rate  has  dropped  significantly since  the  inception  of  the  Stapled  Group  in May  2013,  as  income  under  KLCC  REIT  is not taxable

Figure 5:  KLCCSG’s structure

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

KLCC Stapled Group (KLCC SG) consists of KLCC Property Holdings (KLCCP) and KLCC REIT. KLCCP’s primary focus is on property development and investment, while KLCC REIT is an Islamic REIT that owns the iconic Petronas Twin Towers, among others. 

Recommendation Chart

Source: RHB