Kenanga Research has upgraded its call for KLCCP Stapled Group Bhd (KLCCP) to OUTPERFORM from MARKET PERFORM after the Real Estate Investment Trust (REIT) announced its plan to take full control of Suria KLCC last week.
KLCCP which owned 60% stake of Suria KLCC Sdn Bhd, has announced the proposed acquisition of the remaining 40% stake in Suria KLCC from Ocmador (Malaysia) City Retail Centre Sdn Bhd, Port Moresby Investments Limited, and Bold Peak Sdn Bhd.
“At a price tag of RM1.95 billion, this translates to an overall value of Suria KLCC of RM4.88 billion. This seems to be below the implicit market value of RM5.63 billion as ascertained by an independent evaluation, suggesting that the other shareholders could be eager to liquidate their positions,” the research house said in its Company Update today (Jan 29).
Kenanga said the acquisition would boost its overall bottom line contribution of the stapled security from the retail segment, which presently makes up 40% of the group’s earnings.
“Assuming completion by second quarter of 2024 (2QCY24), we raise our FY24F earnings and distribution payments by 7% as we adjust for
substantially lower minority interests in 2HFY24 attached to Suria KLCC.
“The adjustment is premised on meeting the target completion date of 2QFY24. Meanwhile, we raise the group’s borrowings by RM1.95 billion per its intention to fund the acquisition via debt.”
The research house said thanks to higher forecasted distribution per unit (DPU) for FY24 of 42.5 sen from 39.5 sen based on a 95% payout, in line with historical averages and in accordance to our earnings adjustment above, it raise its target price (TP) to RM7.73 from RM7.18.
“(This is) based on an unchanged target yield of 5.5%, derived from a 1.5% yield spread above our 10-year MGS assumption of 4%,” it added.
Kenanga is positive on the deal as it could support the desired yield of 6% to 7% at a group level.
“Based on FY22 retail segment’s pretax profit of RM380 million, this translates to a yield of 7% from Suria KLCC alone based on complete ownership.
“While KLCC is still responsible for the shareholders of other assets, such as 25% to Mandarin Oriental Hotel, we opine this move could still drastically reduce its minority interest payments as hotel operations have only recently broke even, in 3QFY23.
“Based on FY22 earnings, RM129 million was paid in minority interest leading to group net profit of RM783 million,” it said.
Additionally, the research house said the low yield spread reflects KLCC’s prime asset portfolio, as anchored by its office towers in the KLCC area and Suria KLCC mall.
“We opine that the group’s target markets could be less affected by inflationary headwinds, proven by the increase in moving annual turnover (MAT) reported by the group.
“Additionally, the abovementioned acquisition could support stronger distribution returns from yield seekers up to 6%). There is no
adjustment to our TP based on ESG given a 3-star rating as appraised by us,” it added.
The risks to Kenanga’s call include bond yield contraction, lower-than-expected rental reversions, and lower-than-expected occupancy rates.
