KLCCP Stapled Group Initiate with NEUTRAL Resilient Rental Income and Strong Balance Sheet Target Price: RM6.88

17 April 2015 | Initiate Coverage KLCCP Stapled Group Initiate with NEUTRAL Resilient rental income and strong balance sheet Target Price: RM6.88

INVESTMENT HIGHLIGHTS • Largest REIT in Malaysia with a market cap of RM12.9b; also a component RETURN STATS member of FBMKLCI. • Resilient rental income as 41% of FY14 revenue is from long-term lease Price (16 Apr 2015) RM7.12 with its major shareholder (PETRONAS). Target Price RM6.88 • Superior balance sheet against peers with lowest debt to asset ratio and highest percentage of fixed rate debt. Expected Share Price -3.3% Return • But valuation is already at premium against peers. • Expect a modest growth in FY15 Core Net Income of 2%yoy to RM592.6m. Expected Dividend Yield +4.3% • Initiate coverage with NEUTRAL recommendation and a Target Price of Expected Total Return +1.0% RM6.88. Largest REIT in Malaysia with market cap of RM12.9b; also a component member of FBMKLCI. KLCCP Stapled Group (KLCC) is the largest REIT in Malaysia by market STOCK INFO capitalization. It is the only REIT that is a component member of FBMKLCI. Of the 30 th constituent stocks of FBMKLCI, KLCC is ranked 28 by market cap. Based on our KLCI 1,847.94 assessment, KLCC is likely to remain among the 30 constituent stocks in FBMKLCI in 5235 / the upcoming semi-annual review of the benchmark index in early Jun-2015. Bursa / Bloomberg KLCCSS MK Resilient rental income as 41% of FY14 revenue is from long-term lease with its major shareholder (PETRONAS). KLCC office rental income will remain resilient due Board / Sector Main / REITs to the long-term rental agreements for the PETRONAS Twin Towers, Menara 3 PETRONAS (Office portion) and Menara Dayabumi. These three investment properties Syariah Compliant Yes contributed RM550.7m of revenue or 41% of the Group’s revenue in FY14. Both Issued Shares (mil) 1,805.33 PETRONAS Twin Towers and Menara 3 PETRONAS (Office portion) currently have 15 years lease agreement with PETRONAS (with ~13 years remaining). Menara Dayabumi Par Value (RM) 1.00 lease agreement tenure is 6 years (with ~5 years remaining). Superior balance sheet against peers with lowest debt to asset ratio and highest Market Cap. (RM’m) 12,853.97 percentage of fixed rate debt. KLCC’s debt to asset ratio of 14.9% is the lowest among the six REITs under our coverage (Average 26.2%). The Group also has 100% Price Over NA 2.88 of its debt in fixed rate which is the highest among peers (Average 80%). RM6.22 - 52-wk Price Range But valuation is already at premium against peers. KLCC forward price to dividend RM7.29 ratio of 23.0x is the highest among peers (Average 20.4x). This is despite that its net dividend yield of 4.3% is the lowest among peers (Average: 4.9%) resulting in a spread Beta (against KLCI) 0.57 against MGS yield of only 0.45% (Average: 1.04%). On this basis, its current share price is already trading at premium with market already priced in the strong 3-mth Avg. Daily Vol. 0.50m fundamentals of KLCC. 3-mth Avg. Daily Value RM3.48m Expect a modest growth in FY15 Core Net Income of 2%yoy to RM592.6m. We expect revenue to grow by +3.0%yoy to RM1.40b in FY15. Key assumptions are positive rental reversions of 5.0% and 2.25% for Suria KLCC and PETRONAS Twin Major Shareholders Tower respectively. Suria KLCC rental reversion growth is part of the ongoing lease renewal for 1/3 of the tenants. As for PETRONAS Twin Tower, its Triple Net Lease PETRONAS 75.47% arrangement with a rental of RM349.3m will be reviewed on 1-Oct-2015. For the other investment properties (M3P and MD), there will be no rental reversion in FY15 as the PNB* 9.91% tenancies have not expired. *Included various portions held under different funds

Initiate coverage on KLCC with a NEUTRAL recommendation and a Target Price of RM6.88. Our Target Price is based on Multi Stage Dividend Discount Model (Required rate of return: 8.0%, Perpetual growth rate: 3.1%). We initiate with a NEUTRAL recommendation for KLCC as we believe that upside for this stock is limited as the positives have been priced in. Downside risk is expected to be limited due to its FBMKLCI membership and its strong fundamentals.

KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES

MIDF EQUITY BEAT Friday, 17 April 2015 INVESTMENT STATISTICS

FYE Dec FY12A* FY13A FY14A FY15F FY16F

Revenue NA 1,284 1,354 1,395 1,462 Operating Profit NA 951 1,012 1,046 1,101 Profit Before Tax NA 1,148 1,280 951 995 Net Income NA 826 938 593 617 Core Net Income NA 554 582 593 617 Basic EPS (sen) NA 52.61 51.95 32.83 34.17 Core EPS (sen) NA 35.34 32.24 32.83 34.17 Gross Dividend (sen) NA 28.94 33.64 32.83 34.17 Net Dividend (sen) NA 27.65 31.67 30.90 32.17 Net Distribution Yield NA 3.9% 4.4% 4.3% 4.5% Core PER NA 20.1 22.1 21.7 20.8 NAV per unit NA 7.45 6.66 6.66 6.66 P/NAV NA 0.96 1.07 1.07 1.07 Core ROE NA 4.7% 4.9% 4.9% 5.1% Core ROA NA 3.4% 3.5% 3.5% 3.6% *FY12 data is not available as the current KLCCP Stapled Group only existed from 9-May-2013 onwards Source: Company, Forecast by MIDF Research

Table 1: Peers Comparison Between KLCC And Other REITs Fwd. Market Price Spread % of Debt- Price Cap (RM FY15E Dvd. Over Fixed To- Stock (RM) m) Dvd (Sen) Dvd Yield Ratio MGS Yield MGS Loan Asset AXREIT 3.65 1999 16.94 4.64% 21.5 3.89% 0.75% 53% 32.7% CMMT 1.54 2740 7.92 5.14% 19.4 3.89% 1.25% 69% 28.3% IGBREIT 1.36 4696 7.31 5.38% 18.6 3.89% 1.49% 98% 23.7% PAVREIT 1.55 4675 7.42 4.78% 20.9 3.89% 0.89% 99% 15.2% SUNREIT 1.68 4932 7.87 4.68% 21.3 3.89% 0.79% 81% 31.1% AVG. 4.93% 20.4 1.04% 80%

KLCC 7.12 12854 30.90 4.34% 23.0 3.89% 0.45% 100% 14.9% Source: Respective Company, Forecast by MIDF Research

Chart 1: KLCC market cap of RM12.9b is the biggest in Malaysia

Market Cap (RM m) 14,000 12,854 12,000 10,000 8,000

6,000 4,696 4,675 4,932 4,000 2,740 1,999 2,000 - AXREIT CMMT IGBREIT PAVREIT SUNREIT KLCC

Source: Company, MIDF Research Compilation 1. Background and Corporate Structure

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KLCC is a stapled structure of KLCC Property Holdings Berhad (KLCCP) and KLCC REIT. KLCCP Stapled Group (KLCC) is a stapled structure in which each KLCCP share is stapled together with one unit of KLCC REIT. Both KLCCP and KLCC REIT are currently traded as single listed security under KLCC which has replaced the listing status of KLCCP. KLCC was formally listed In Bursa Malaysia on 9 May 2013 under REIT sector.

Chart 2: KLCC Corporate Structure

Source: Company

KLCC REIT is mainly an “Office” REIT with three investment properties valued at RM9.04b. KLCC REIT property portfolio comprises of three investment properties - the PETRONAS Twin Towers, Menara ExxonMobil and Menara 3 PETRONAS. All three properties are strategically located within the Kuala Lumpur City Centre. Based on the latest valuation on 31-Dec-2014, these three properties have been valued at RM9.04b. Overall, KLCC REIT owns 4.54m square feet of Net Lettable Area (NLA) out of which 4.40m square feet (97.0%) are for office rental and the remaining balance of 0.13m square feet (3.0%) for rental as retail space. In FY14, KLCC REIT contributed RM592.9m or 44.0% to KLCC’s total revenue.

Leasing of PETRONAS Twin Towers and Menara 3 PETRONAS (Office portion) under Triple Net Lease Agreement. Triple Net Lease is a lease arrangement whereby the lessee (the tenant) bears all real estate taxes, building takaful and maintenance of the subject property in addition to rental and utilities bill. Effectively, this means that KLCC Stapled Group does not incur the usual cost to maintain its properties for expenses such as real estate property taxes, insurance and maintenance works. We are neutral on such arrangement. Although KLCC expenses will be lower as compared to other REITs due to the Triple Net Lease Agreement, we believe that the rental rates have also been lowered (against Normal Agreement without Triple Net Lease).

Chart 3: Location of KLCC REIT Properties

Source: Company

Table 2: Details of KLCC REIT Properties 3 MIDF EQUITY BEAT Friday, 17 April 2015

Acquired Mkt Value Office NLA Office Retail NLA Retail Price (RM Property (RM m) Stake (sqft) Occ. Rate (sqft) Occ. Rate m) PETRONAS Twin Towers 6700.0 100% 3,195,544 100% NA NA 6500.0 Menara 3 PETRONAS 1875.0 100% 812,806 100% 132,101 93% 1790.0 Menara ExxonMobil 465.0 100% 395,851 100% NA NA 450.0 TOTAL 9040.0 4,404,201 132,101 8740.0

Source: Company *Based on Acquisition Price on 10-April-2013

Table 3: Key Features of KLCC REIT

Fund Type Income and Growth Shariah Status Shariah Compliant

Distributions on a quarterly basis or such other intervals. To distribute 90% of KLCC REIT Distribution Policy distributable income from FY15 onwards. Gearing Policy Up to 50% of Total Asset Value of the Fund. Base Fee 0.3% per annum of Total Asset Value of the Fund. Performance Fee 3.0% per annum of Net Property Income

Source: Company *Based on Acquisition Price on 10-April-2013

KLCCP owns a property portfolio which is diversified. KLCCP was incorporated as a public limited company on 7-Feb-2004. Subsequently on 18-Aug-2004, the Company gained its listing status on Bursa Malaysia before finally being formed as part of the current KLCC as part of the restructuring exercise. KLCCP owns a diverse property portfolio comprising Suria KLCC Shopping Mall, a 5-star hotel (Mandarin Oriental), Kompleks Dayabumi, a commercial vacant land known as Lot D1 and also a 33% interest in Menara Maxis. All KLCCP properties are located in the Kuala Lumpur City Centre except Menara Dayabumi which is located within the former Central Business District of Kuala Lumpur.

Chart 4: Location of KLCCP Properties

Source: Company

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Biggest revenue contributor for KLCCP is Suria KLCC (55.0% of KLCCP’s revenue). Despite of the diversified portfolio, the biggest contributor in FY14 is Suria KLCC Shopping Mall which generated RM421.3m revenue or 55.0% of KLCCP’s total revenue. This is followed by Mandarin Oriental contributing RM183.3m or 24.0% of KLCCP’s total revenue. Collectively, both Suria KLCC Shopping Mall and Mandarin Oriental contributed ~80.0% of KLCCP’s total revenue in FY14.

Chart 5: Revenue Breakdown of KLCCP (Total Revenue: RM760.6m)

15% Suria KLCC Mandarin Oriental 56% Management Services 24% Others

Source: Company, MIDF Research

Table 4: Details of KLCCP’s Subsidiaries

Segment Subsidiaries/Associate Stake Tenure Details Shopping mall located at the base of the Property PETRONAS Twin Towers. It has 1.035m Portfolio - square feet of Net Lettable Area. In FY14, Suria Retail Suria KLCC Sdn Bhd 60% Freehold KLCC achieved an Occupancy Rate of 98%.

Property Mandarin Oriental (MO) is a 5-star hotel with Portfolio - 643 rooms. In FY14, MO achieved an Hotel Mandarin Oriental (Asas Klasik Sdn Occupancy Rate of 62.6% with an Average Operations Bhd) 75% Freehold Room Rate of RM649.

An integrated office development with complementary retail podium. The building comprises of a 36-storey purpose-built office Property building (known as Menara Dayabumi) with an Portfolio - 99-year annexed 6-storey office cum retail podium Office Kompleks Dayabumi Sdn Bhd 100% Leasehold (known as City Point).

Property Vacant Land Lot D1 (Impian Portfolio Cemerlang Sdn Bhd) 100% Freehold 1.4 acres of vacant land adjacent to MO. Management Provides facility management services to KLCC Services KLCC Urusharta Sdn Bhd 100% NA and other companies under PETRONAS. Management Services KLCC Parking Management Sdn Bhd 100% NA Provides car parking management services. Management Services KLCC REIT Management Sdn Bhd 100% NA Manager of KLCC REIT Others Arena Merdu Sdn Bhd 100% NA Inactive Others Arena Johan Sdn Bhd 100% NA Inactive Others Midciti Resources Sdn Bhd 100% NA Inactive

Source: Company, MIDF Research Compilation

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At KLCC Stapled Group’s level, profit contribution from KLCC REIT is higher than KLCCP due to tax exemption. KLCCP is the main contributor with a revenue of RM760.6m or 56.0% contribution to the KLCC Stapled Group’s revenue. Meanwhile, KLCC REIT contributes RM592.9m or 44.0% in revenue to KLCC Stapled Group. However in terms of Operating Profit (OP), KLCC REIT contributed RM519.9m or 51.0% while KLCCP contribution is lower at RM504.9m or 49.0% to KLCC Stapled Group’s OP in FY14. We believe that KLCC REIT’s higher OP is due to the tax exemption on its earnings after distributing at least 90.0% of its total taxable income to unitholders.

Chart 6: Revenue and Operating Profit Breakdown of KLCC

Revenue Operating Profit

44% KLCC REIT KLCC REIT 56% 49% 51% KLCC Property KLCC Property

Source: Company, MIDF Research Compilation 2. Financial Analysis

5.0%yoy growth in both Revenue and Core Net Income in FY14. In FY14, KLCC revenue grew +5%yoy to RM1.35b on the back of higher revenue from Management Services (MS) division (+21%yoy to RM169.9m). MS division’s revenue was higher due to increase in car park rates and provision of additional services for facilities management. In line with revenue growth of +5%yoy, Core Net Income also improved+ 5%yoy to RM582.0m. For our Core Net Income calculation, we have excluded the Fair Value Gain On Investment Properties (RM386m) and the one-off RM30m share on the deferred tax liability for the 33% associate Menara Maxis.

Expect FY15 Core Net Income to grow by a modest 2.0%yoy to RM592.6m. Key assumptions are positive rental reversions of 5.0% and 2.25% for Suria KLCC and PETRONAS Twin Tower respectively. Suria KLCC rental reversion growth is part of the ongoing lease renewal for 1/3 of the tenants. We have assumed rental reversion growth to slow down to 5.0% (against FY14’s 12%) due to more challenging outlook for retailers in shopping mall in view of the implementation of GST. As for PETRONAS Twin Tower, its Triple Net Lease rental of RM349.3m will only be reviewed on 1-Oct-2015, hence we only expect only a marginal position contribution from the rental reversion in 4QFY15. PETRONAS Twin Tower Triple Net Lease rental agreements will be reviewed every 3 years based on the formula of 3.0% per annum compounded over the preceding three years. As for PETRONAS Twin Tower, its Triple Net Lease arrangement with a rental of RM349.3m will be reviewed on 1-Oct-2015. For the other investment properties (M3P and MD), there will be no rental reversion in FY15 as the tenancies have not expired. However, for FY16E we expect its Core Net Income growth to be better at +4.9%yoy. FY16 will be the year of which the rental review of PETRONAS Twin Tower expected at total 9.27% to reflect on a full year basis. For Suria KLCC, we continue to assume a conservative +5.0%yoy growth in rental reversion in FY16.

Strong balance sheet with debt to asset ratio of 14.9%. KLCC’s balance sheet is strong with total debt of RM2.51b against total asset of RM16.80b. Effectively this translates into a debt to asset ratio of 14.9% which we deem as comfortable. Against FY13’s debt to asset ratio of 14.3%, the increase is minimal and we opine that its gearing as still very healthy as it is well below the 50.0% requirement for REITs.

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3. Peers Comparison Biggest REIT in Malaysia with a market cap of RM12.9b; also a constituent member of FBMKLCI. Based on share price of RM7.12 and 1.81b shares, KLCC market cap of RM12.9b is the biggest among the local REIT stocks. It is the only REIT stock that is a component member of FBMKLCI. Of the 30 constituent stocks of FBMKLCI, KLCC is ranked 28th by market cap. Based on our assessment, KLCC is likely to remain among the 30 constituent stocks in the FBMKLCI in the upcoming semi-annual review in early Jun-2015. Ground Rules for FTSE Bursa Malaysia have specified that a security will be deleted if its market cap ranking falls to 36th place or below. As KLCC market cap is still ranked at 30th among all stocks in Malaysia, the stock is likely to retain its position in FBMKLCI. KLCC is ranked 28th within FBMKLCI members but ranked 30th among all stocks in Malaysia as two companies which are higher in terms of market cap have not been included in FBMKLCI due to other criterias such as lower free float.

Table 5: FBMKLCI members (from 26th to 30th only)

Rank Stock Market Cap (RM m) 26 YTLCORP 17.09 27 SKPETRO 16.00 28 KLCC 12.85 29 UMW 12.69 30 FGV 7.77

Source: Bloomberg Table 6: Top Malaysia stocks by market cap (from 26th to 30th only)

Rank Stock Market Cap (RM m) 26 ASTRO 17.11 27 YTLCORP 17.09 28 SKPETRO 16.00 29 WPRTS 14.12 30 KLCC 12.85

Source: Bloomberg Superior balance sheet against peers with lowest debt to asset ratio and highest percentage of debt in fixed rate. KLCC’s debt to asset ratio of 14.9% is the lowest among the six REITs under our coverage (Average 26.2%). This reflects that KLCC has the lowest gearing, thus a strong balance sheet. The lower debt to asset ratio provides room to expand it future investment assets by another RM2.0b (in which its debt to asset ratio will then reach 26.8% on par with peers) without significantly affecting its dividend payout. The Group also has 100% of its debt in fixed rate which is the highest among peers (Average 80%). Valuation is at premium against peers. KLCC forward price to dividend ratio of 23.0x is the highest among peers (against average 20.4x). This is despite that its net dividend yield of 4.3% is the lowest among peers (average: 4.9%) resulting in a spread against MGS yield of only 0.45% (average: 1.04%). On this basis, its current share price is already trading at premium with market already priced in the strong fundamentals of KLCC.

Chart 7: KLCC has lowest Debt-To-Asset ratio among peers

32.7% 35% 31.1% 30% 28.3% 23.7% 25% 20% 14.9% 15.2% 15% 10% 5% 0% KLCC PAVREIT IGBREIT CMMT SUNREIT AXREIT

Source: Company, MIDF Research Compilation

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Chart 8: KLCC expected net dividend yield is also lowest among peers

Net Dividend Yield, % 6.00% 5.38% 5.14% 4.78% 4.68% 5.00% 4.64% 4.34% 4.00% 3.00% 2.00% 1.00% 0.00%

Source: MIDF Research Estimate

4. Sector Outlook NEUTRAL on REIT sector as we expect MGS yield to be volatile in the near term. This is mainly due to global economic uncertainties. This is likely the impact the stability of the spreads between REIT-MGS yield. On interest rates, our economist expects BNM to maintain OPR at 3.25% for the rest of the year. This should keep financing cost stable for all REIT players. For valuation, we have taken into account the volatility of MGS yield as we are assuming 4.2% for the risk free rate by using MGS-10 Year Yield as proxy. Our assumption of 4.20% is more conservative as MGS-10 Year Yield is currently lower at 3.87%.

GST implementation is expected to slow down consumer spending. This should limit REITs FY15 CNI growth. We opine that REIT players will be affected indirectly by GST as it may limit the potential rental reversion growth for shopping mall owners. As consumer spending is expected to be dampened with the implementation of GST, tenants’ business revenue will be impacted, hence affecting their ability to afford higher rental rates. We have taken this into consideration as we already expect Suria KLCC rental reversion growth to slow down to +5%yoy (against FY14’s +12%yoy growth).

5. Valuation Initiate coverage on KLCC with a NEUTRAL recommendation and a Target Price of RM6.88. Our Target Price is based on Multi Stage Dividend Discount Model. Our estimate of Required Rate Of Return, E(R) is based on Capital Asset Pricing Model (CAPM) method. As a result, we derive a an expected return E (R) of 8.0% by assuming Risk Free Rate of 4.2%, Beta at 0.569 and market return at 10.9%. Subsequently, the E(R) of 8.0% is used in the Multi Stage Dividend Discount Model. Based on other inputs such as Stage 2 Dividend Growth Rate of 4.5% and Terminal Growth of 3.1%, we derive our Target Price of RM6.88. Our recommendation is NEUTRAL for KLCC. We believe that upside for this stock is limited as the positives have been priced in. Downside risk is expected to be limited due to its FBMKLCI membership and its strong fundamentals (resilient rental income, and superior balance sheet.

Table 6: Key Variables Used In Valuation

CAPM Model Input Value Risk Free Rate, RFR 4.2% Beta, β 0.569 Market Return, Rmarket 10.9% Required Rate Of Return, E(R) 8.0%

DDM Model Input

Required Rate Of Return, E(R) 8.0% DDM Stage 1 Growth - FY15E -2.4% DDM Stage 1 Growth - FY16E 4.1% DDM Stage 2 Growth - Year 3 to Year 10 4.5% Terminal Growth, g 3.1%

Source: MIDF Research Estimate

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6. Investment Risks

Oversupply of office spaces. As explained previously, KLCC REIT’s investment properties (PETRONAS Twin Towers, Menara 3 PETRONAS and Menara Exxonmobil) are located within the KLCC Development and are mostly offices. Hence, the rental income and value of these investment properties may be affected by market conditions such as oversupply of offices of similar grade. Market conditions at the time of lease/tenancy renewal or rent review and the availability of space and rental terms of comparable properties may affect KLCC REIT ability to maintain or increase its rental revenue. In 2013, the overall occupancy rate in Kuala Lumpur was 79% based on National Property Information Centre (NAPIC) with 1.62m sq m of office space still vacant. However, we believe that this risk will be mitigated by the long term lease period of KLCC REIT’s investment properties. For example, both PETRONAS Twin Towers and Menara 3 PETRONAS (Office portion) currently have 15 years lease agreement with PETRONAS (with ~13 years remaining of the lease period).

Chart 9: Total and Occupied Space for Existing Office in Kuala Lumpur

10.00 84%

8.00 82% 80% 6.00 78% 4.00 76% 2.00 74% 0.00 72% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total Space, mil sq m Total Space Occupied, mil sq m Occupancy Rate

Source: NAPIC, MIDF Research

Oversupply of retail spaces. In the year 2013, the overall occupancy rate for shopping complexes in Malaysia is 80% based on National Property Information Centre (NAPIC) with 2.48m sq m of space still vacant. However, we believe that this risk is mitigated by the strategic location of Suria KLCC at the PETRONAS Twin Towers and on the doorstep of the KLCC park.

Slowdown in consumer spending post GST implementation may be worse than expected. Currently, we have assumed Suria KLCC rental reversion growth to slow down to 5.0% (against FY14’s 12.0%). However, the real impact of GST will only be known from 2Q15 onwards.

Concentration risk. For KLCC REIT, all of its investment properties (PETRONAS Twin Towers, Menara 3 PETRONAS and Menara Exxonmobil) are located within the KLCC Development. As for KLCCP, all of its properties are located in the KLCC Development area except Menara Dayabumi which is located within the former Central Business District of Kuala Lumpur. Hence, any unforeseen natural disasters or negative events affecting its assets will impact KLCC earnings and the value of its investment properties significantly.

7. Management Team Strong management team. KLCC is managed by very experienced personnel. The Company’s Chairman Mr. Krishnan CK Menon has a solid background in accounting. He is a Fellow of the Institute of Chartered Accountants in England and Wales, a member of the Malaysian Institute of Accountants and the Malaysian Institute of Certified Public Accountants. Meanwhile, the Chief Executive Officer (CEO) Datuk Hashim Bin Wahir has been with PETRONAS Group for 34 years since his graduation way back in 1981. Details of the Board Of Directors’ Profile are attached in Table 7 and Table 8.

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Table 7: Board Of Directors’ Profile

NAME Position Background

-He is a Fellow of the Institute of Chartered Accountants in England and Wales, a member of the Malaysian Institute of Accountants and the Malaysian Institute of Certified Public Accountants. -He spent 13 years in public practice with Hanafiah Raslan & Mohamad, 7 years of which he served as a partner. He then joined Public Bank Berhad as General Manager and was subsequently promoted to Executive KRISHNAN C K MENON Chairman Vice President. After serving 2 public listed companies, he joined Putrajaya Holdings Sdn Bhd as Chief Operating Officer in 1997 for 3 years before leaving the company in 2000. -Currently, Mr. Menon sits on the boards of Petroliam Nasional Berhad, Scicom (MSC) Berhad, Econpile Holdings Berhad, MISC Berhad and KLCC (Holdings) Sdn Bhd.

-34 years of experience with PETRONAS Group -Whilst in PETRONAS, he undertook various assignments within the PETRONAS group including exploration and production (“E&P”) operations, international E&P and gas DATUK HASHIM BIN WAHIR CEO asset acquisitions, group strategic planning and corporate development. -Presently a Director and the Group Chief Executive Officer of KLCC (Holdings) Sdn Bhd (“KLCCH”).

-More than 10 years experience with PETRONAS Group. -Executive Vice President & Group Chief Financial Officer of PETRONAS DATUK MANHARLAL A/L Non-Independent Non- -Prior to joining PETRONAS in 2003, he was attached RATILAL Executive Director with a local investment bank for 18 years. -He also sits on the boards of Cagamas Holdings Berhad, MISC Berhad, PETRONAS Gas Berhad and other subsidiaries of PETRONAS.

-34 years of experience with PETRONAS Group -Previously CEO of KLCC Property Holdings Berhad from Feb-2004 to Apr-2007. -Fellow Member of the Chartered Institute of Management Non-Independent Non- Accountants (CIMA) and a member of the Malaysian DATUK ISHAK BIN IMAM ABAS Executive Director Institute of Accountants (MIA). -Currently Non-Executive Director of Deleum Berhad, Standard Chartered Bank Malaysia Berhad, Standard Chartered Saadiq Berhad and Integrated Petroleum Services Sdn Bhd.

-More than 30 years experience in financial and general management. -He is an Executive Director of Usaha Tegas Sdn Bhd (“UTSB”), the Executive Deputy Chairman and Group Independent Non- Chief Executive Officer of Astro Holdings Sdn Bhd group AUGUSTUS RALPH MARSHALL Executive Director and an Executive Director of Tanjong Public Limited Company, in which UTSB has significant interests. -He is an Associate of the Institute of Chartered Accountants in England and Wales and a member of the Malaysian Institute of Certified Public Accountants.

Source: Company

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Table 8: Board Of Directors’ Profile (Continued)

NAME Position Background -Previously Chairman of Pengurusan Aset Air Berhad. -Previously served on the boards of PETRONAS, Employees Provident Fund (EPF), Inland Revenue Board Independent Non- (IRB), Bank Pertanian, Federal Land Development DATO' HALIPAH BINTI ESA Executive Director Authority and UDA Holdings Berhad. -Serves on the boards of various public listed companies such as MISC Berhad, Malaysia Marine and Heavy Engineering Holdings Berhad and S P Setia Berhad.

-More than 20 years of experience with KLCC as he joined KLCC Projeks Sdn Bhd in March 1993 as General Manager. DATUK PRAGASA MOORTHI A/L Non-Independent Non- -He is the person who oversees management of design, KRISHNASAMY Executive Director construction and completion of the various building in KLCC such as the PETRONAS Twin Towers, Menara Maxis and Menara ExxonMobil.

-Member of the Institute of Chartered Accountants of England and Wales, Malaysian Institute of Certified Public Accountants and Malaysian Institute of Accountants. Independent Non- HABIBAH BINTI ABDUL -34 years of experience in providing audit and business Executive Director advisory services. -Sits on the boards of PETRONAS Gas Berhad, CIMB Islamic Bank Berhad and CIMB Investment Bank Berhad.

Source: Company

8. Key Shareholders 88.14% of its shares held by key shareholders. KLCC shares are tightly held as PETRONAS owns 75.47% of the total shares. As of 20-Jan-2015, the second largest shareholder is PNB with 9.91% stake followed by EPF (1.66%) and KWAP (1.10%). For PNB stake, we have included various portions held under different funds such as Skim Amanah Saham Bumiputera and Amanah Saham Wawasan 2020. Collectively, the four major shareholders own 88.14% of KLCC shares.

Table 9: Key Shareholders of KLCC

Key Shareholders Stake* PETRONAS 75.47% PNB 9.91% EPF 1.66% KWAP 1.10% Total 88.14%

Source: Company *As at 20-Jan-2015 based on KLCC Annual Report 2014

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Income Statement Balance Sheet FY Dec (RM m) 2012A* 2013A 2014A 2015E 2016E FY Dec (RM m) 2012A* 2013A 2014A 2015E 2016E

Revenue NA 1284 1354 1395 1462 Plant and Equipment NA 612 610 637 664

EBITDA NA 951 1012 1046 1101 Investment Properties NA 14109 14496 14656 14806

Fair Value Gain on Inv Prop NA 271 386 0 0 Receivables NA 135 220 225 236

Interest Income NA 36 34 37 38 Cash** NA 1082 1127 1147 1188

Interest Expense NA -123 -145 -156 -169 Other Assets NA 328 351 356 360

Associates NA 13 -7 24 25 Total Assets NA 16265 16804 17021 17255

Pretax Income NA 1148 1280 951 995 LT Borrowings NA 1569 2155 2355 2555

Taxation NA -116 -121 -126 -134 LT Payables NA 299 263 271 284

Minority Interest NA -207 -221 -233 -244 ST Borrowings NA 757 357 357 357

Net Profit NA 826 938 593 617 Others NA 233 181 181 181

Core Net Income*** NA 554 582 593 617 Total Liability NA 2858 2956 3164 3377

Unitholders' capital NA 1805 1805 1805 1805

Accumulated Income NA 131 153 153 153

Cashflow Statement Others NA 9759 10067 10067 10067 FY Dec (RM m) 2012A* 2013A 2014A 2015E 2016E Total Equity NA 11695 12026 12026 12026 Cash Receipt From NA 1289 1242 1283 1345 Minority Int NA 1712 1822 1831 1853 Customers Cash Payment To Suppliers & NA -233 -318 -331 -344 Equity + Liability NA 16265 16804 17021 17255 Employees Interest Income From Fund NA 35 35 37 38 and other inv Tax Paid NA -177 -115 -126 -134 Key Ratios Operating CF NA 914 843 864 906 FY Dec (RM m) 2012A* 2013A 2014A 2015E 2016E

Dividends Received NA 0 6 6 6 Revenue Growth NA NA 5.4% 3.0% 4.9%

Purchase of PPE NA -39 -27 -27 -27 Core Net Income Growth NA NA 5.0% 1.8% 4.1%

Expansion of Inv Properties NA -54 -41 -160 -150 EBITDA Margin NA 74.1% 74.8% 75.0% 75.3%

Proceeds from PPE disposal NA 0 0 0 0 Core Net Income Margin NA 43.2% 43.0% 42.5% 42.2%

Investing CF NA -93 -62 -181 -171 Core ROE NA 4.7% 4.9% 4.9% 5.1%

Dividend Paid NA -405 -609 -593 -617 Core ROA NA 3.4% 3.5% 3.5% 3.6%

Interest paid NA -115 -112 -156 -169 Debt To Asset NA 14.3% 14.9% 15.9% 16.9% Net Borrowings NA -28 95 200 200 Debt To Equity NA 19.9% 20.9% 22.5% 24.2% Drawdown/(Repaid) Dividend To Min Int NA -200 -111 -111 -111 Distribution yield (%) NA 3.9% 4.4% 4.3% 4.5% Stapled Securities Associated NA -11 0 0 0 Core PER (x) NA 20.15 22.08 21.69 20.84 Cost Paid Decrease In Deposits NA 16 2 2 2 NAV per unit NA 7.45 6.66 6.66 6.66 Restricted Financing CF NA -743 -734 -658 -695 P/NAV NA 0.96 1.07 1.07 1.07

Net change in cash NA 77 48 25 41

Cash @ Beginning NA 997 1074 1122 1147 Key Drivers And Assumptions Cash @ End** NA 1074 1122 1147 1188 FY Dec (RM m) 2012A* 2013A 2014A 2015E 2016E Total Net Lettable Area NLA NA 6.29 6.18 6.18 6.18 (m sqft) Blended Rental Rate (RM NA 11.02 14.21 14.77 15.65 pqsft)

Blended Occupancy Rate NA 98.5% 99.5% 99.5% 99.5% *FY12 data is not available as the current KLCCP Stapled Group only exist from 9-May-2013 onwards **Cash shown in Cashflow Statement and Balance Sheet is different due to Deposits Restricted. ***FY14 Core Net Profit excludes the Fair Value Gain On Investment Properties (RM386m) and the one-off RM30m share on the deferred tax liability of investment property. Source: Company, Forecast by MIDF Research

12 MIDF EQUITY BEAT Friday, 17 April 2015

DAILY PRICE CHART

Kelvin Ong, CFA Alan Lim, CFA [email protected] 03-2173 8464

13 MIDF EQUITY BEAT Friday, 17 April 2015

MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad)

DISCLOSURES AND DISCLAIMER

This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose.

MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS

STOCK RECOMMENDATIONS

BUY Total return is expected to be >15% over the next 12 months.

Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been TRADING BUY assigned due to positive newsflow.

NEUTRAL Total return is expected to be between -15% and +15% over the next 12 months.

SELL Negative total return is expected to be -15% over the next 12 months.

Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been TRADING SELL assigned due to negative newsflow.

SECTOR RECOMMENDATIONS

POSITIVE The sector is expected to outperform the overall market over the next 12 months.

NEUTRAL The sector is to perform in line with the overall market over the next 12 months.

NEGATIVE The sector is expected to underperform the overall market over the next 12 months.