Version 5 Bloomberg: KLCCSS MK Reuters: KCCP.SI Refer to important disclosures at the end of this report Malaysia Equity Research 23 Jan 2017 HOLD Last Traded Price ( 20 Jan 2017): RM7.82 (KLCI : 1,664.89) Price Target 12-mth: RM8.20 (5% upside) (Prev RM8.05) Shariah Compliant: No Potential Catalyst: Yield-accretive asset injections Where we differ: Largely in line with consensus Analyst Inani ROZIDIN +603 2604 3905 inanirozidin@alliancedbs.com What s New FY16 earnings in line Declares DPU of 9.85 sen, ex-date 6 Feb Resilient outlook with long lease office space and prime asset locations Maintain HOLD with TP RM8.20 Price Relative Forecasts and Valuation FY Dec (RM m) 2016A 2017F 2018F 2019F Revenue 1,344 1,487 1,531 1,577 EBITDA 1,048 1,151 1,184 1,218 Pre-tax Profit 1,103 1,025 1,055 1,085 Net Profit 886 759 774 789 Net Pft (Pre Ex.) 719 759 774 789 Net Pft Gth (Pre-ex) (%) 6.0 5.5 2.0 1.9 EPS (sen) 49.1 42.0 42.9 43.7 EPS Pre Ex. (sen) 39.8 42.0 42.9 43.7 EPS Gth Pre Ex (%) 6 6 2 2 Diluted EPS (sen) 39.8 42.0 42.9 43.7 Net DPS (sen) 35.6 37.2 38.5 40.7 BV Per Share (sen) 697 700 702 704 PE (X) 15.9 18.6 18.2 17.9 PE Pre Ex. (X) 19.6 18.6 18.2 17.9 P/Cash Flow (X) 15.1 14.6 14.2 13.5 EV/EBITDA (X) 24.2 22.1 21.6 21.1 Net Div Yield (%) 4.6 4.8 4.9 5.2 P/Book Value (X) 1.1 1.1 1.1 1.1 Net Debt/Equity (X) 0.3 0.3 0.3 0.3 ROAE (%) 18.6 15.9 16.2 16.5 Earnings Rev (%): 0 0 - Consensus EPS (sen): 42.3 43.9 - Other Broker Recs: B: 5 S: 1 H: 6 Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P Heart of the city Maintain HOLD. We expect (KLCCSS) s assets to maintain their performance due to their super-prime locations in KL city centre, some of the best among peers. The core assets are its office assets supported by its retail segment. However, given the outlook for flat rentals, we see limited upside from current levels for KLCCSS. Best in class assets and tenants. About half of KLCCSS s operating profit is derived from office buildings, comprising four assets which include Malaysia s iconic PETRONAS Twin Towers. These assets boast long lease terms of up to 15 years, triple-netlease structures, and solid tenant profiles that include PETRONAS and ExxonMobil. Fixed rental escalations (ranging from 9-14% every three years) built into the tenancies underpin steady revenue growth for the stapled security. Significant growth only from 2019 onwards. Asset enhancement works for Kompleks Dayabumi is on track and it is presently in phase 3 of the extension plan. The net lettable area (NLA) of the tower is 1m square feet (sq ft), comprising 0.5m sq ft of office space, with the rest used for retail and hospitality. The vacant Lot D1 (1.3m sq ft) is awaiting a suitable anchor tenant before development commences. KLCCSS also has right of first refusal (ROFR) to parent KLCC Holdings planned developments around the KLCC area. Given the low implied yields at current prices, any potential acquisitions should be value-accretive to the REIT. Valuation: After rolling forward our valuations, our DDM-derived TP rises to RM8.20, with 7% cost of equity and 1% terminal growth. Key Risks to Our View: Weak sentiment could hurt retail and hospitality sector. The soft consumer spending outlook and GST implementation could have an impact on KLCCSS retail and hospitality assets. The former may be hurt by poorer rental reversions, and the latter by fewer visitors and bookings. At A Glance Issued Capital (m shrs) 1,805 Mkt. Cap (RMm/US$m) 14,118 / 3,174 Major Shareholders (%) Petroliam Nasional Bhd 75.5 Free Float (%) 20 3m Avg. Daily Val (US$m) 1.6 ICB Industry : Real Estate / Real Estate Refer to important disclosures at the end of this report ed: JS / sa:bc
WHAT S NEW Similar operating conditions in FY17 Challenging market conditions FY16 core net profit of RM719m (+6% y-o-y) was within our/consensus expectations. Earnings were higher owing to the resilient performance of the office and retail segments. 4Q16 core net profit of RM180m (-2% y-o-y) was within our/consensus expectations. Earnings were lower due to the refurbishment expenses in the hotel segment. We expect earnings from the office and retail segments to remain resilient, and the hotel segment to continue to be challenging due to weak consumer demand. DPU of 9.85 sen was declared, which brings FY16 DPU to 35.65 sen. This implies a payout of 95.4% in FY16 (FY15: c.97.5%). Office segment to stay resilient The office segment was steady, with revenue coming in at RM591m (flat y-o-y) amid a weak market. Moreover, operating profit was also stable at RM472m due to rental recognition of additional lease area in Menara Dayabumi offsetting the higher cost incurred from maintenance works. Its office portfolio s occupancy was full as at end-4q16. Asset enhancement works for Kompleks Dayabumi are on track and presently in phase 3 of the extension plan. The office portion at CityPoint has also been closed for redevelopment as part of the overall Kompleks Dayabumi enhancement initiative. We also note that the long-term lease at Menara ExxonMobil was renewed for a term of nine years from early-fy17, with the option to renew for further three successive terms of three years each. However, ExxonMobil will only retain 60% occupancy of the building. Management has identified new tenants to occupy the remaining 40%. Tenant revamping for retail segment The retail segment (mainly Suria KLCC) recorded revenue of RM488m (flat% y-o-y), attributable to the shift in tenant mix from the ongoing reconfiguration of men s and women s luxury precinct on level 1. We expect reversion rates to be positive next quarter as the tenant reconfiguration was completed in 4Q16. In FY16, 24 new tenants came onboard at Suria KLCC, replacing the tenants that left. New tenants included Chanel (Cosmetics), Saint Laurent, Dior (Ladies) and Marc Jacobs. Marketing initiatives planned for the hotel segment The hospitality segment s topline declined by 4% y-o-y to RM149m due to overall weaker market demand. The drop is mainly due to the absence of large-scale banqueting events which dampened F&B performance. In addition, the hotel segment (mainly Mandarin Oriental) commenced refurbishment works in certain parts of the hotel. There was a write-off of furniture and fittings for the Sultan s Lounge of RM2.7m. Currently refurbishing the Club Rooms and Suites with target completion in mid-2017. There are additional plans in the pipeline for refurbishment of all rooms, commencing in FY18. In addition, management has re-opened the Casbah and Sultan s Lounge with a new concept. Quarterly / Interim Income Statement (RMm) FY Dec 4Q2015 3Q2016 4Q2016 % chg yoy % chg qoq Revenue 347 330 345 (0.7) 4.6 Cost of Goods Sold (93.8) (90.8) (89.8) (4.3) (1.1) Gross Profit 253 239 255 0.6 6.8 Other Oper. (Exp)/Inc (8.1) (9.1) (6.3) (22.1) (31.3) Operating Profit 425 246 258 (39.3) 4.8 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm Associates & JV Inc 4.97 3.72 1.11 (77.6) (70.2) Net Interest (Exp)/Inc (19.7) (20.0) (20.2) (2.3) (1.0) Exceptional Gain/(Loss) 439 0.0 167 (62.0) nm Pre-tax Profit 850 230 406 (52.2) 76.5 Tax (32.8) (25.7) (13.3) (59.3) (48.1) Minority Interest (193) (26.2) (45.7) 76.4 74.5 Net Profit 623 178 347 (44.3) 94.8 Net profit bef Except. 184 178 180 (2.2) 1.1 EBITDA 438 259 266 (39.4) 2.5 Margins (%) Gross Margins 73.0 72.4 73.9 Opg Profit Margins 122.5 74.8 74.9 Net Profit Margins 179.6 54.1 100.7 Source of all data: Company, AllianceDBS Page 2
4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 Company Guide CRITICAL DATA POINTS TO WATCH Office NLA (k sq ft) Earnings Drivers: Triple net leases for office assets. KLCCSS has four main prime office buildings: the PETRONAS Twin Towers, Menara Petronas 3, Menara ExxonMobil, and Menara Dayabumi. All except Menara Exxon Mobil are on triple-net-lease structures, i.e. insurance, maintenance, quit rent and assessment will be borne by the tenants instead of KLCCSS. Menara Exxon Mobil is on a long-term lease. Hence, net property income (NPI) margins are high at about 90% with minimal volatility from cost pressures. Rental rates are locked for the long term as well, with threeyear built-in step-ups. Together, these office assets generate c.45% of topline and over 50% of pretax (PBT). Of the four, Twin Towers, Petronas 3 and Menara ExxonMobil are in the REIT component of the stapled security so that their earnings are eligible for tax benefits. The effective tax rate for KLCCSS is <15%, and is expected to remain at that level going forward. Suria KLCC avg rental psf/m (RM) Retail exposure. KLCCSS owns 60% of the c.1m sq ft NLA Suria KLCC, which sees over 45m footfall annually from locals and tourists. The rental rates, averaging c.rm29psf/mth, reflect its super-prime location. Most of the leases at this property are for three years with about a third of NLA expiring annually. Reversions have historically been strong at double-digit rates, which we expect to be sustained given its prime location. The stapled security also has another 132k sq ft NLA of retail space in the Petronas 3 building. Together, the retail assets contribute c.35% to topline and pretax. Mandarin Oriental RevPAR (RM) Key development works. KLCCSS is currently in the process of demolishing the Menara Dayabumi / CityPoint Podium asset. A 65-storey office asset, a 6-storey retail area (c.0.5m sq ft NLA), and a 5-star, 500-room hotel to be managed by the Shangri-La group will be built. Completion is targeted for 2019. Also, the vacant Lot D1 (which can be developed into 1.4m sq ft of gross floor area) is seeking an anchor tenant before development works kick off. ROFRs to more prime assets. Holding company KLCC Holdings has separate joint ventures (JVs) with Qatari Diar Asia Pacific and Sapura Resources, and are developing two major assets in the KLCC area (Lot 185 and Lot 91 respectively). KLCCSS has the right of first refusal (ROFR) to both assets, which are expected to be office-centric assets with completion dates in 2019. Additionally, the 4-star, 571-room Traders Hotel within the KLCC area is also a potential candidate for injection. Modest hospitality exposure. KLCCSS also owns the 5-star Mandarin Oriental hotel located within the KLCC area. The 643- room hotel also has meeting, incentive, conference & exhibition (MICE) facilities to cater to its corporate clientele. However, PBT contribution is small at 2-3%. Quarterly operating profit (RM m) and margin (%) 265.0 255.0 245.0 235.0 225.0 215.0 205.0 195.0 Operating profit Operating profit margin 77% 76% 75% 74% 73% 72% Page 3
Balance Sheet: Solid balance sheet. KLCCSS has a net gearing ratio of c.20%, which is relative low compared to 25-35% for other M-REITs. It also has a large cash pile of c.rm1bn. Debt maturity is weighed towards the long term as only c.rm1bn will mature within the next four years. More than 85% of its borrowings (RM2.2bn) are from the RM3bn sukuk facility, and 86% of borrowings are on fixed rates. Share Price Drivers: Asset growth opportunities. KLCCSS management has claimed it is selective on acquisitions, focusing only on super-prime properties. While this could limit near-term non-organic growth options, the completion and injection of key assets in 2019 and beyond implies that growth will only pick up significantly in the medium term. Key Risks: Weak sentiment could hurt retail and hospitality sector. The soft consumer spending outlook and the GST implementation could have an impact on KLCCSS s retail and hospitality assets. The former may be hurt by poorer rental reversions, and the latter by fewer visitors and bookings. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Company Background KLCC Stapled Security is a stapled group comprising KLCC REIT (which owns the Petronas Twin Towers, Menara ExxonMobil and Petronas Tower 3), and KLCC Property, (which holds Kompleks Dayabumi, Mandarin Oriental and Suria KLCC). Forward PE Band (x) PB Band (x) Page 4
Key Assumptions Office NLA (k sq ft) 5,146 5,146 5,146 5,146 5,146 Suria KLCC avg rental psf/m 29.7 31.6 33.6 35.7 38.0 Mandarin Oriental RevPAR 292 401 448 461 475 Segmental Breakdown Revenues (RMm) Office 557 592 600 600 600 Retail 496 488 563 595 629 Hotel 184 149 212 220 229 Managed Services 102 114 112 115 119 Total 1,340 1,344 1,487 1,531 1,577 Operating (RMm) Office 526 524 540 540 540 Retail 402 400 455 481 509 Hotel 18.2 11.6 42.4 44.1 45.8 Managed Services 74.2 76.9 65.0 67.0 69.0 Others (15.8) (13.7) 0.0 0.0 0.0 Total 1,004 999 1,102 1,133 1,164 Operating Margins (%) Office 94.4 88.5 90.1 90.1 90.0 Retail 80.9 82.0 80.8 80.9 80.9 Hotel 9.9 7.7 20.0 20.0 20.0 Managed Services 72.4 67.7 58.0 58.0 58.0 Total 74.9 74.4 74.2 74.0 73.8 Income Statement (RMm) Revenue 1,340 1,344 1,487 1,531 1,577 Cost of Goods Sold (336) (365) (384) (398) (413) Gross Profit 1,004 978 1,102 1,133 1,164 Other Opng (Exp)/Inc 0.0 25.3 0.0 0.0 0.0 Operating Profit 1,004 1,004 1,102 1,133 1,164 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 13.7 10.9 13.4 13.4 13.4 Net Interest (Exp)/Inc (78.3) (78.7) (90.5) (91.7) (93.0) Exceptional Gain/(Loss) 453 167 0.0 0.0 0.0 Pre-tax Profit 1,392 1,103 1,025 1,055 1,085 Tax (115) (91.7) (139) (145) (153) Minority Interest (272) (125) (128) (136) (144) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 1,006 886 759 774 789 Net Profit before Except. 679 719 759 774 789 EBITDA 1,048 1,048 1,151 1,184 1,218 Growth Revenue Gth (%) (1.0) 0.2 10.7 3.0 3.0 EBITDA Gth (%) 1.3 (0.1) 9.9 2.8 2.9 Opg Profit Gth (%) (0.8) (0.1) 9.9 2.8 2.8 Net Profit Gth (Pre-ex) (%) (1.6) 6.0 5.5 2.0 1.9 Margins & Ratio Gross Margins (%) 74.9 72.8 74.2 74.0 73.8 Opg Profit Margin (%) 74.9 74.7 74.2 74.0 73.8 Net Profit Margin (%) 75.0 65.9 51.0 50.5 50.0 ROAE (%) 21.8 18.6 15.9 16.2 16.5 ROA (%) 5.9 5.0 4.3 4.4 4.4 ROCE (%) 5.5 5.3 5.5 5.6 5.8 Div Payout Ratio (%) 97.5 95.4 90.0 90.0 90.0 Net Interest Cover (x) 12.8 12.8 12.2 12.4 12.5 Page 5
Quarterly / Interim Income Statement (RMm) FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 Revenue 347 335 335 330 345 Cost of Goods Sold (93.8) (92.8) (91.8) (90.8) (89.8) Gross Profit 253 242 243 239 255 Other Oper. (Exp)/Inc (8.1) (7.6) (10.1) (9.1) (6.3) Operating Profit 425 252 247 246 258 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 4.97 3.01 3.04 3.72 1.11 Net Interest (Exp)/Inc (19.7) (19.2) (19.3) (20.0) (20.2) Exceptional Gain/(Loss) 439 0.0 0.0 0.0 167 Pre-tax Profit 850 236 230 230 406 Tax (32.8) (26.7) (25.9) (25.7) (13.3) Minority Interest (193) (26.7) (26.6) (26.2) (45.7) Net Profit 623 183 178 178 347 Net profit bef Except. 184 183 178 178 180 EBITDA 438 263 260 259 266 Growth Revenue Gth (%) 3.0 (3.6) (0.1) (1.5) 4.6 EBITDA Gth (%) 65.4 (40.0) (1.2) (0.2) 2.5 Opg Profit Gth (%) 67.0 (40.7) (2.2) (0.1) 4.8 Net Profit Gth (Pre-ex) (%) 1.2 (0.8) (2.7) 0.2 1.1 Margins Gross Margins (%) 73.0 72.3 72.6 72.4 73.9 Opg Profit Margins (%) 122.5 75.4 73.7 74.8 74.9 Net Profit Margins (%) 179.6 54.6 53.2 54.1 100.7 Balance Sheet (RMm) Net Fixed Assets 639 672 706 741 776 Invts in Associates & JVs 265 279 292 305 319 Other LT Assets 15,457 15,507 15,557 15,607 15,657 Cash & ST Invts 1,111 1,074 1,035 994 955 Inventory 1.84 1.96 2.04 2.10 2.16 Debtors 62.9 67.1 69.8 71.9 74.1 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 17,537 17,601 17,662 17,721 17,784 ST Debt 28.5 28.5 28.5 28.5 28.5 Creditor 278 302 318 330 342 Other Current Liab 24.6 24.6 24.6 24.6 24.6 LT Debt 2,532 2,532 2,532 2,532 2,532 Other LT Liabilities 162 162 162 162 162 Shareholder s Equity 4,775 4,777 4,776 4,775 4,774 Minority Interests 9,736 9,774 9,819 9,869 9,921 Total Cap. & Liab. 17,537 17,601 17,662 17,721 17,785 Non-Cash Wkg. Capital (238) (258) (271) (281) (290) Net Cash/(Debt) (1,450) (1,486) (1,526) (1,567) (1,605) Debtors Turn (avg days) 20.4 17.7 16.8 16.9 16.9 Creditors Turn (avg days) 323.3 318.9 324.8 328.3 329.2 Inventory Turn (avg days) 2.3 2.1 2.1 2.1 2.1 Asset Turnover (x) 0.1 0.1 0.1 0.1 0.1 Current Ratio (x) 3.5 3.2 3.0 2.8 2.6 Quick Ratio (x) 3.5 3.2 3.0 2.8 2.6 Net Debt/Equity (X) 0.3 0.3 0.3 0.3 0.3 Net Debt/Equity ex MI (X) 0.3 0.3 0.3 0.3 0.3 Capex to Debt (%) 6.0 4.6 4.7 4.8 4.9 Z-Score (X) 3.5 3.5 3.4 3.4 3.4 Page 6
Cash Flow Statement (RMm) Pre-Tax Profit 1,518 989 1,025 1,055 1,085 Dep. & Amort. 30.5 33.5 35.6 37.9 40.2 Tax Paid (108) (132) (139) (145) (153) Assoc. & JV Inc/(loss) (13.7) (13.4) (13.4) (13.4) (13.4) Chg in Wkg.Cap. (29.1) 19.3 13.6 9.49 9.76 Other Operating CF (466) 40.1 41.6 52.2 79.9 Net Operating CF 932 936 964 995 1,049 Capital Exp.(net) (153) (117) (120) (123) (126) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 9.12 0.0 0.0 0.0 0.0 Net Investing CF (144) (117) (120) (123) (126) Div Paid (738) (767) (794) (822) (869) Chg in Gross Debt 47.2 0.0 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (115) (89.3) (90.5) (91.7) (94.0) Net Financing CF (806) (857) (884) (914) (963) Currency Adjustments 0.0 0.0 0.0 0.0 1.00 Chg in Cash (17.5) (36.7) (39.5) (40.8) (38.4) Opg CFPS (sen) 53.3 50.8 52.7 54.6 57.6 Free CFPS (sen) 43.2 45.4 46.8 48.3 51.1 Target Price & Ratings History Source: AllianceDBS Analyst: Inani ROZIDIN Page 7
DISCLOSURE Stock rating definitions STRONG BUY - > 20% total return over the next 3 months, with identifiable share price catalysts within this time frame BUY - > 15% total return over the next 12 months for small caps, >10% for large caps HOLD - -10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps FULLY VALUED - negative total return > -10% over the next 12 months SELL - negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame Commonly used abbreviations Adex = advertising expenditure EPS = earnings per share PBT = profit before tax bn = billion EV = enterprise value P/B = price / book ratio BV = book value FCF = free cash flow P/E = price / earnings ratio CF = cash flow FV = fair value PEG = P/E ratio to growth ratio CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter Capex = capital expenditure m = million RM = Ringgit CY = calendar year M-o-m = month-on-month ROA = return on assets Div yld = dividend yield NAV = net assets value ROE = return on equity DCF = discounted cash flow NM = not meaningful TP = target price DDM = dividend discount model NTA = net tangible assets trn = trillion DPS = dividend per share NR = not rated WACC = weighted average cost of capital EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date Page 8
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Additional information is, subject to the overriding issue of confidentiality, available upon request to enable an investor to make their own independent evaluation of the information contained herein. Wong Ming Tek, Executive Director Published by AllianceDBS Research Sdn Bhd (128540 U) 19th Floor, Menara Multi-Purpose, Capital Square, 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur, Malaysia. Tel.: +603 2604 3333 Fax: +603 2604 3921 email : general@alliancedbs.com Page 9