gsg_stock discussion

Stockwatch- KLCC Property (Malaysia) RM$2.27 Deutsche Bank initiate coverage 16 Oct 2006

Deutsche Bank - Equity Research

KLCC Property Holdings {Ticker: KCCP.KL, Closing Price: 2.22 MYR, Target Price:2.90 MYR, Recommendation: Buy}

* Most sought after commercial address at 10% implied yield; initiate with Buy

KLCC Property (KLCCP) offers investors an opportunity to co-own the world's tallest Twin Towers and other prime commercial assets at a 10% asset yield vs the market transacted yield of 5%. In addition, it offers 10-15% pa earnings growth in FY07-09E, a net div yield of 3.6% as well as potential upside from the growing pipeline of assets from its parent company. Our RM2.90 price target values the company at 9% implied yieldor 22% discount to RNAV. Buy.

* Defensive rental stream plus leverage to uptrend in property cycle

39% of KLCCP's rental revenue has locked-in rental growth of 3% cagr, at least until 2012. The rest is leveraged to the current uptrend in the commercial property cycle. We project a 5-10% pa growth in office rental and capital value in 2007 due to tightening supply and growing demand. We estimate that every 10% rise in hotel ARR and retail rental increases FY07E net profit by 2.6% and 4%, respectively.

* Rising free cash flow + opportunity to make value-accretive acquisition

KLCCP's projected rising free cash flow, from RM133m in FY07E to RM531min FY2011E, provides it with great financial flexibility to pay higher dividends and/or make acquisitions, especially after FY09.Opportunities are plenty given the parent company's growing asset portfolio.

* Trading at 40% discount to RNAV; TP offers >30% upside

At TP of RM2.90, we value KLCCP at 9% implied asset yield, pricing it at the lower end of the 9-10.7% historical range. The discount reflects the low possibility of it divesting its assets, and regulatory restriction on foreigners to invest in property. Key risks include a sharp downturn in the domestic economy, interest rate hikes and sustainability of current premium rental rate.

posted by gsg @ 12:45 AM