Its Prospects.. KLCCP

KLCCP

Its Prospects … dated July 2011

It is one of the few companies that have benefited from revaluing its property portfolios despite the softening real estate market.

In its March 31, 2011, KLCCP recorded a rm547 million gain from revaluation of its assets, which boosted its bottom line to rm707 million.

The annual revaluation of KLCCP’s assets has increased the market value of its assets by 8% to 15% against their book value.

Gains or losses arising from changes in the fair value of properties are recognised in the statement of comprehensive income in the period which they arise.

This means that when the market value of a property falls, KLCCP will have will have to revalue its assets downwards which is unlikely.

It is worth nothing that KLCCP recorded a whopping rm750 million gain its last quarter ended March 31, 2010 from the revaluation of its assets, which include the Petronas Twin Towers , Suria KLCC, Menara ExxonMobil and Menara Dayabumi.

The question is, given the softening property market, can KLCCP continue to make big gains from the revaluation of its assets? Are its assets nearing their peak?

Property prices will continue to go up as raw material prices increase. Furthermore, KLCCP has a pool of quality assets. The company is sitting on over rm14 billion worth of properties (versus rm12 billion book value).

KLCCP’s net assets per share stood at rm5.60. Its shareholders’ funds stood at rm5.23 billion as at March 31, 2011. Based on a share base of 1.295 billion – after full conversion of RCULS – this translates into a book value of rm4 per share.

Like many other property companies, KLCCP is trading below its book value.

One can easily see that KLCCP’s profits have been inflated by asset revaluation gains. In FY2011, gains from revaluation of KLCCP’s assets accounted for almost 80% of its earnings. In the year before, a gain of rm758 million from a fair value readjustment was more than earnings which stood at rm648 million.

It is worth nothing that KLCCP earns steady income and healthy operating cash flow from leasing out its retail and office spaces.

In FY2011 ended March 31. KLCCP’s operations generated rm631 million in cash, boosting its cash position to rm673 million.

The company has also been consistently paying out about 40% of its earnings as cash dividends.

However it is beginning to lose its luster against the backdrop of a softening property market and potential share overhang from the RCULS conversion.

Catalysts for KLCCP going forward include the long term lease renewal by its key lessor Petronas.

Also KLCCP is also beginning to see income from its Lot C development, which is expected to generate recurring income of about rm100 million annually. The company is also expecting more income from the refurbishment of its Dayabumi complex.

KLCCP plans to develop its Lot 1D parcel, which will be another mixed development.

There is also talk that KLCCP may acquire Petrona’s assets or buy properties in the KLCC vicinity as a way to bump up its asset portfolio but this has been denied.