The KLCC Twin Towers have been the symbol of Malaysia since it is completed in 1998. The development is funded by the national oil and gas company, PETRONAS. However, you might not know that PETRONAS has since listed this development on Bursa Malaysia in 2004, allowing investors to own a piece of this iconic development. Is this a good investment for investors? Here are seven things you need to know about KLCCP Stapled Group now.
TICKER SYMBOL: KLSE:5235SS | 5235SS.KL
MARKET CAP: RM 14.1 Billion (Updated 5th June 2017)
The company was listed in 2004 as KLCC Property Holdings Bhd. However, in 2013, the management restructured the company into a stapled security. Three of the main buildings, PETRONAS Twin Towers, Menara ExxonMobil and Menara 3 PETRONAS were injected into the KLCC Real Estate Investment Trust while the rest of the assets remained in KLCC Property Holdings.
So currently, an investor investing in KLCCP Stapled Group would own both the KLCC REIT and KLCC Property Holdings. Some key assets under KLCC Property Holdings include:
- 60% Stake in Suria KLCC Retail Mall
- 75% in Mandarin Oriental KL
- Kompleks Dayabumi
- A facility management service company
- A car park management service company
- 33% stake in Menara Maxis
By 2016, KLCCP Stapled Group recorded a revenue of RM1.3 billion and has an investment portfolio of RM15.5 billion. Its net asset value per stapled security is at RM7.09.
From its 2016 result, its revenue is generated from four main segments:
- Office (44%)
- Retail (35%)
- Hotel (11%)
- Management Services (10%)
However, its segmental profit before tax is distributed slightly differently. In 2016, 56.4% of its profit before tax is coming from its office segment, with 39.2% contribution from its retail segment and 4.8% from its management services. For the year 2016, its hotel business was faced with a RM3.2 million loss due to ongoing room renovations.
Why The Complexity?
Before we go any further, what exactly is a stapled security? Basically, the stapled security combined the ownership of both a company (KLCC Property Holdings) and a REIT (KLCC REIT) into one. The stapled structure of KLCCP Stapled Group gives is the tax incentive of being a REIT and the flexibility of being a company. This is because a REIT can save on taxes if the operating income is distributed back to unitholders. This means that the net property income generated by KLCC REIT would enjoy little or no tax if all the income is distributed back to its unitholders. If these properties are still under KLCC Property Holdings, the net property income generated would still be taxed based on the company’s corporate tax rate.
On the flip side, because REIT needs to pay out most of its earnings, there will be little buffer cash left for reinvestment for growth. Which is why having KLCC Property Holdings included in the stapled group is an advantage. The reinvestment and growth capital expenditure can continue to be undertaken by KLCC Property Holdings without affecting the tax benefit of KLCC REIT.
Having said that, what are the key opportunities and risks that lied ahead for KLCCP Stapled Group?
Given that KLCC is the most prime land in the whole of Malaysia, the demand for its properties is always high. Its grade A properties for both its commercial and retail command a premium rental compared to its peers. Thus, this gives KLCCP a very stable source of revenue.
On top of that, its anchor tenant is also the parent company of the stapled group; PETRONAS. This allows KLCCP to have a stable and yet sticky form of rental from part of its property portfolio.
Compared to other REITs, KLCCP is considered a diversified property group for an income investor. Its rental and other revenue are generated from a wide range of sources. The retail, offices, hospitality and services segments give KLCCP a good diversification across many sectors, reducing the overall risk of its properties.
Stellar Balance Sheet
Lastly, KLCCP Stapled Group has one of the best balance sheets among REITs and property companies in Malaysia. The group has arguably the best properties in Malaysia and yet its gearing ratio is only at 20%. This means that for every dollar of asset it owns, only 20% of that is funded by debt, which is a very low amount for a REIT or property company. This allows KLCCP to have the flexibility to expand at its own pace and not worry about liquidity and refinancing issues.
In the short term, there might be some oversupply issues in the office spaces in Kuala Lumpur. The office rental market is softening and that might be a risk for the group. On top of that KLCC REIT saw a release of 40% of its leased area in Menara ExxonMobil in January 2017 after the expiry of its lease term with ExxonMobil. However, the REIT commented that it is nearing the finalisation of a lease agreement for this 40% space in Menara ExxonMobil and should be completed by the second quarter of 2017. This again shows the prime status of its properties.
Lack of Growth
Another issue for the group is the lack of visible growth for KLCCP Stapled Group. Given that its parent company, PETRONAS, is not in the property sector, it does not have an active land acquisition strategy. This means that KLCCP has a very small land bank available for development. For a property company, land bank is the lifeline for its future growth. Without a strong pipeline of land for development, KLCCP can only rely mostly on the rental revision to fuel its growth in revenue. Even though the company has a hotel and management businesses, they are still too small to make a significant impact on the group’s bottom line.
KLCCP Stapled Group is now offering a dividend yield of 4.6% and trading at 1.1 times its book value. That is roughly in line with its 5-year average valuation of 1.2 times book value.
It seems that KLCCP Stapled Group might be quite reasonably valued at 1.1 times, but investors need to take into consideration the lack of growth potential for this stapled group.
Investor Relation Contact
Tel: +603-2783 7291
Level 33 & 34, Menara Dayabumi
50050 Kuala Lumpur
Federal Territory of Kuala Lumpur
Top Shareholders (31st Dec 2016)
- Petroliam Nasional Berhad – 64.677%
- Amanah Saham Bumiputera – 5.66%
- Employees Provident Fund Board – 2.73%
Income Statement – Click Here
Balance Sheet – Click Here
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned.