KLCC,MRCB, MEDIA SECTOR from CIMB

CIMB squawk box

There were no major surprises from KLCC Property Holdings (KLCC MK, RM3.20) annual briefing except for the extremely low occupancies suffered by all hoteliers during the Apr F1 race. No changes to earnings forecasts and target price of RM3.50. However, we are downgrading the stock from Hold to SELL in view of 1) lack of positive catalysts, and 2) increasing preference by investors for higher beta developers. Although dividend yield of 4% is decent, it pales in comparison with REITs which average 10%. Potential de-rating catalysts for KLCC Prop include 1) dilutive effect of RCULS conversion, 2) hotel occupancy rate risks due to weak demand and intense competition, 3) switch by investors to higher beta property development stocks.

Media Sector. The Edge weekly reported the emergence of two new free Chinese publications. First was the launch of The Busy Weekly in Jan 09 and secondly was Red Tomato over the weekend. We are negatively surprised by the timing of the launches as global advertising is still weak. The concern is especially so for free newspapers, as its income stream solely relies on advertising revenue. Another concern is the cost factor which could lead to longer-than-expected breakeven period. The entry of the two new publications would also intensify competition which is negative for incumbents. We maintain our NEUTRAL stance on the media sector. Our forecast of a 6-10% decline in total industry adex in 2009 is unchanged. End-09 would be a good re-entry point for exposure to selected media stocks as the risk-reward ratio is only likely to turn positive then.

The Edge Weekly reported that Malaysian Resources Corp (MRC MK, RM1.21) aims to have at least one fifth of its operating income as a sustainable, recurring stream in three years, driven by toll road operations, retail and building management income. It has no plans to spin-off MRCB Land, and the retails assets may be injected into a REIT. We continue to be encouraged by management’s optimism on the prospects for both its construction and property businesses. The group believes that pump-priming is set to take off in a big way in 2H09. Our earnings forecasts are unchanged. Maintain TRADING BUY and RNAV-based target price of RM2.00 which is pegged to an unchanged 30% discount to RNAV. Progress of the LRT upgrade/extension in Klang Valley and positive surprises on Bakun power transmission are potential re-rating catalysts. The stock is our top GLC construction play.