Sukuk Debt Will Impair Future Profitability

Key Takeaways

• Increased financing costs from the Suria KLCC acquisition could impact net margins and profitability due to higher borrowing.
  
• Heavy reliance on occupancy rates and marketing in the Retail segment may face challenges from weakening consumer demand, affecting revenue.
  
• KLCCP's diverse and resilient portfolio across various segments ensures steady revenue growth and enhanced financial stability, potentially boosting future net margins and earnings.

Catalysts

KLCC Property Holdings Berhad (KLCCP) and KLCC REIT, collectively known as KLCCP Stapled Group is Malaysia's largest self-managed stapled security that invests, develops, owns and manages a stable of iconic and quality assets.

• The acquisition of the remaining 40% equity interest in Suria KLCC, funded by external financing, could lead to increased financing costs in the future, potentially impacting net margins and profitability negatively.
  
• Despite positive current performance, the increase in borrowing and gearing ratio could limit financial flexibility and pose risks if economic conditions deteriorate, impacting future earnings growth.
  
• The heavy reliance on high occupancy rates and marketing efforts in the Retail segment to sustain growth may face challenges if consumer demand weakens, potentially affecting revenue projections.
  
• The growth strategy involves further leveraging KLCC Precinct partnerships for unique offerings in the Hotel segment; however, any downturn in travel or tourism could reduce occupancy rates, impacting future revenue and earnings.
  
• High financial leverage with the issuance of a significant Sukuk program, while helping fund strategic acquisitions, may constrain the ability to pursue additional growth initiatives or mitigate future financial risks, thereby impacting long-term earnings growth.

KLCC Property Holdings Berhad Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KLCC Property Holdings Berhad's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 58.9% today to 50.1% in 3 years time.
• Analysts expect earnings to reach MYR 943.7 million (and earnings per share of MYR 0.53) by about February 2028, down from MYR 1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.0x on those 2028 earnings, up from 15.0x today. This future PE is greater than the current PE for the MY REITs industry at 17.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.84%, as per the Simply Wall St company report.

KLCC Property Holdings Berhad Future Earnings Per Share Growth

Risks

• KLCCP Stapled Group's strong and resilient portfolio, particularly in the Office segment with long-term and stable income streams, contributes to steady revenue and secure earnings. This resilience could counteract potential future declines.
  
• The robust performance of the Retail segment, driven by a high occupancy rate at Suria KLCC and successful marketing efforts, supports strong revenue growth that may sustain or increase further in the future.
  
• The successful acquisition of the remaining equity interest in Suria KLCC is positively impacting KLCCP's bottom line by potentially optimizing and enhancing asset synergies, which may bolster net margins and earnings.
  
• The Hotel segment is experiencing increased demand and revenue growth thanks to its strong brand presence and successful marketing initiatives, potentially boosting overall revenue and contributing to improved profit margins.
  
• KLCCP's disciplined capital management, including a successful Sukuk issuance with a strong credit rating and a manageable gearing ratio, fortifies financial stability and supports long-term value creation, which may protect or enhance net margins and earnings in the future.

Valuation

• The analysts have a consensus price target of MYR8.508 for KLCC Property Holdings Berhad based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MYR1.9 billion, earnings will come to MYR943.7 million, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of MYR8.44, the analyst price target of MYR8.51 is 0.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.