Wednesday, November 20, 2013

Invested in KLCC Property Holdings Berhad

Please read the disclaimer here:http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. Enjoy the article, bitches!


I picked up some shares in KLCC Property Holdings Berhad or KLCC stapled securities as they're called these days for RM6.10. KLCCP (we will refer to the company as KLCCP in this article) is listed on the Bursa Malaysia with the stock code 5235SS. I like the company because it owns high quality properties in strategic locations. You know that a real estate portfolio has some good stuff when one of its properties appears in postcards and “Visit Malaysia” advertisements. KLCCP is trading at a P/E ratio of 15.5 (based on annualized quarter 3, 2013 earnings) which is reasonable. The income-generating properties that KLCCP owns or have an interest in are: The Petronas Twin Towers, Suria KLCC, Kompleks Dayabumi, Menara ExxonMobil and Menara 3 Petronas.

One way to tell if a portfolio of properties is really the bomb is by looking at the average revenue it earns per square foot (psf). The following tables compare KLCCP’s average revenue psf against that of other real estate investment trusts (REITS):




Office

Average annual revenue psf

(Ringgit Malaysia)

KLCC

109.84

Sunway

47.14

UOA

54.99

Pavillion

64.00



Retail

Average annual revenue psf

(Ringgit Malaysia)

KLCC

236.0467 (its significantly higher than this, please see notes to tables)

 

Sunway

102.28

Pavillion

255.40

 

 



Notes to the tables

I use the term average revenue psf instead of average rent psf as some of the REITs generates revenue from stuff like parking.

The average revenue psf figures are calculated from data in the prospectus of KLCCP and in the 2012 annual reports of the other REITs. 

KLCCP’s average revenue psf doesn’t include Suria KLCC as I couldn’t find the necessary data. A research report from Maybank estimates Suria KLCC’s average rental psf at RM 25 per month (RM 300 per year) for fiscal year 10/11. It may be even higher now. Most of the retail segment’s revenue is contributed by Suria KLCC. 

KLCCP’s average revenue psf doesn’t include Kompleks Dayabumi as I couldn’t find the necessary data. However, Kompleks Dayabumi’s contribution to the office segment’s revenue is not really significant so I guess its ok to exclude it.  


As you can see from the tables, KLCCP’s properties are able to command higher rental rates than its competitors. However, to determine the sustainability of a REIT’s revenue psf we have to look at the occupancy rate of its properties. A high occupancy rate obviously indicates high demand for space in the REIT’s properties. The higher the demand for space in a property, the more likely it is that rental rates can be maintained or even increased. Supply and demand, bitches! That’s what it’s all about.The Petronas Twin Towers, Menara ExxonMobil and Menara 3 Petronas office tower have 100% occupancy as at December 31, 2012. The Menara 3 Petronas retail podium has an occupancy rate of 92.20% and while I can’t find data on KLCC Suria’s occupancy rate, KLCCP expects it to be at 99% in 2013.


The Petronas Twin Towers and Menara 3 Petronas office tower is leased by a single tenant: Petronas, obviously. Menara Exxonmobil is also leased by a single tenant: Exxonmobil (bet you didn’t see that coming). My point is that these 2 industry giants are really high-quality tenants and it’s likely that they will keep renewing their leases over the long-term. The risk of KLCCP’s property portfolio experiencing significant vacancy rates is therefore limited. 


A good piece of real estate should be able to raise its rental rate at a pace that’s at least in line with inflation so that it maintains its value in real terms. KLCCP’s properties certainly have been able to increase their rental rates recently. Revenue from the office segment experienced a year-on-year increase of 17.8% for the third quarter, 2013 due to the renewal of the lease for the Petronas Twin Towers effective 1 October 2012. Higher rental rates from lease renewals contributed to a 14.9% increase in revenue from the retail segment. KLCCP has made provisions in its long-term lease contracts to revise rental rates upwards periodically. The rental rate of the Petronas Twin Towers and Menara 3 Petronas office tower will be reviewed every 3 years based on the formula of 3% per annum compounded for the preceding 3 years. 

KLCCP’s properties are all freehold with the exception of Kompleks Dayabumi which lease expires in 2079. So, there’s no need to worry about KLCCP losing its income sources anytime in the foreseeable future.

If you annualize KLCCP’s net profit attributable to stapled securities holders for the third quarter, 2013, you would get RM 711.22 million or RM 0.394 per stapled security. At its current price of around RM 6.10, the stock would have a P/E ratio of 15.5 which also translates to an earnings yield of 6.45%. I think it’s a reasonable deal as I don’t believe it will be easy to find a property with a 6.45% rental yield after subtracting costs for maintenance, negotiating leases with clients and etc. The stapled security should also give you more liquidity. When you invest in KLCCP, you will also be buying into a portfolio of top quality properties which should really pay off over the long-term. 

KLCCP also owns the Mandarin Oriental hotel. According to KLCCP’s 2012 annual report, the hotel has the largest market share amongst Kuala Lumpur’s luxury hotels, so they must be doing something right. If you’re ever visiting Kuala Lumpur, help a brother out and stay the night at the Mandarin Oriental! Thank you for reading, take care.

6 comments:

  1. LIKE ! But would not buy KLCCP at the moment, keep it in database.

    ReplyDelete
    Replies
    1. hopefully it drops more so I can increase my position and other value investors can get in at a lower price.

      Delete
  2. The problem is KLCCP is not obliged to pay out all of the dividends.. received from the stapled Reit which must pay 90% to KLCCP. So overall DY is still very low...

    ReplyDelete
    Replies
    1. Hi Gark, thanks for commenting. I'm not investing in it as a pure dividend play. I don't mind if they reinvest profits to further enhance its assets as ROI generally is quite high on such capex on strategically located properties. Their competitive advantage is in the quality of its real estate, you can't build another twin towers or suria klcc, at least not at the heart of the city. So it should be able to sustain premium rental rates. Over the long-term I think the quality will payoff.

      I'm treating it like any ordinary stock, if it can reinvest profits at a higher rate than the market by all means reinvest my money :-)

      Delete
  3. They have 2 more plots of empty freehold land next to existing buildings, if those building are developed they will add future rental.

    ReplyDelete
    Replies
    1. That is great! Hope they utilize those land effectively to create value for shareholders

      Delete