KUALA LUMPUR: CIMB Equities Research is retaining its Hold call on KLCC Property Holdings Bhd (KLCCP) with a higher dividend discount model-based (DDM) target price of RM7.69.
It said on Monday KLCCP’s share price has always traded at a premium over its peers due to its size, prime location and secured office assets that are locked in triple net leases, as well as the strong brand name of its retail assets.
“As such, its earnings are more resilient and sheltered from a downturn in the office and retail segments than its peers. Upside risk is earlier injection of potential assets and downside risk is lower-than expected occupancy rate,” it said.
CIMB Research said recent meeting with KLCCP revealed lower-than-expected occupancy rates for Menara Exxon-Mobil and the hotel segment, and lower rental reversions in retail.
Key takeaways from meeting KLCCP were: 1) the office segment will see a mild dip in FY17F due to the loss of income from Menara Exxon-Mobil, 2) the retail segment will be main earnings driver in FY17F, due to positive rental reversions and topline growth from new tenants, 3) the hotel segment’s earnings in FY17F will stay muted as the Mandarin Oriental is undergoing guest room refurbishments, and 4) management service earnings will be boosted by additional facilities management services in Kerteh, Terengganu.
Occupancy for Menara Exxon-Mobil is currently 60% (vs. 100% in FY16) after the Exxon-Mobil lease expired in January 2017.
“We understand that management is identifying potential tenants for the vacant 40% and targets to maintain its long-term lease structure.
“As we assume occupancy will only rise gradually in 2H17F onwards, we expect a 1% on-year dip in the office segment’s core pretax profit in FY17F from the loss of income, which would be slightly mitigated by the additional net lettable area (NLA) at Dayabumi,” it said.
CIMB Research pointed out Suria KLCC’s average monthly rental rates of RM30 per sq ft and tenant sales growth of 4% on-year in FY16 reflect its super-prime location.
It expects Suria KLCC’s occupancy rates to gradually rise to historical average of 98% by end-FY17F (vs. 96% in FY16) and forecast rental reversions of 5% for one-third of NLA per annum as tenancy profile improves.
Its hotel segment is likely to stay muted with average occupancy of 49-53% (FY17F-FY19F), until Mandarin Oriental room refurbishments are completed (in stages) by end-FY18F.
“We have been too optimistic on our rental reversion assumptions for the retail segment and occupancy rates for the office segment, particularly Menara Exxon-Mobil.
“As such, we cut FY17-19F EPS forecasts by 6-7%. Furthermore, we revise our DDM assumptions – reducing the discount rate to 7.4% from 7.8% as the equity risk premium has narrowed, given the recent re-rating of the FBM KLCI, as well as increasing our terminal growth assumption to 2.1% (vs. 1.7% previously),” said CIMB Research.
It said on Monday KLCCP’s share price has always traded at a premium over its peers due to its size, prime location and secured office assets that are locked in triple net leases, as well as the strong brand name of its retail assets.
“As such, its earnings are more resilient and sheltered from a downturn in the office and retail segments than its peers. Upside risk is earlier injection of potential assets and downside risk is lower-than expected occupancy rate,” it said.
CIMB Research said recent meeting with KLCCP revealed lower-than-expected occupancy rates for Menara Exxon-Mobil and the hotel segment, and lower rental reversions in retail.
Key takeaways from meeting KLCCP were: 1) the office segment will see a mild dip in FY17F due to the loss of income from Menara Exxon-Mobil, 2) the retail segment will be main earnings driver in FY17F, due to positive rental reversions and topline growth from new tenants, 3) the hotel segment’s earnings in FY17F will stay muted as the Mandarin Oriental is undergoing guest room refurbishments, and 4) management service earnings will be boosted by additional facilities management services in Kerteh, Terengganu.
Occupancy for Menara Exxon-Mobil is currently 60% (vs. 100% in FY16) after the Exxon-Mobil lease expired in January 2017.
“We understand that management is identifying potential tenants for the vacant 40% and targets to maintain its long-term lease structure.
“As we assume occupancy will only rise gradually in 2H17F onwards, we expect a 1% on-year dip in the office segment’s core pretax profit in FY17F from the loss of income, which would be slightly mitigated by the additional net lettable area (NLA) at Dayabumi,” it said.
CIMB Research pointed out Suria KLCC’s average monthly rental rates of RM30 per sq ft and tenant sales growth of 4% on-year in FY16 reflect its super-prime location.
It expects Suria KLCC’s occupancy rates to gradually rise to historical average of 98% by end-FY17F (vs. 96% in FY16) and forecast rental reversions of 5% for one-third of NLA per annum as tenancy profile improves.
Its hotel segment is likely to stay muted with average occupancy of 49-53% (FY17F-FY19F), until Mandarin Oriental room refurbishments are completed (in stages) by end-FY18F.
“We have been too optimistic on our rental reversion assumptions for the retail segment and occupancy rates for the office segment, particularly Menara Exxon-Mobil.
“As such, we cut FY17-19F EPS forecasts by 6-7%. Furthermore, we revise our DDM assumptions – reducing the discount rate to 7.4% from 7.8% as the equity risk premium has narrowed, given the recent re-rating of the FBM KLCI, as well as increasing our terminal growth assumption to 2.1% (vs. 1.7% previously),” said CIMB Research.
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