A Towering Success

KLCC Property Holdings prices Malaysia''s biggest IPO of the year.

After a two-week book building period and a one-week global road show, the IPO for KLCC Property Holdings of Malaysia priced over the weekend. Books closed at 5pm on Friday evening and the deal was priced the following morning. CIMB was sole bookrunner on the deal and CLSA was international financial adviser.

At RM1.80 a share, the institutional portion of the deal priced close to the top of the initial range of RM1.50-RM1.90 (the range was tightened during the book building phase to RM1.70-RM1.90 a share). The company raised some RM772.8 million ($203million).

The retail portion of the deal was always going to price at a 7% discount to the institutional portion and thus the price came in at RM1.67 a share. However retail investors had been asked to bid for shares at a price of RM1.68 a share and so those investors whose applications have been successful will be refunded one sen per share.

Demand for the deal was very strong from retail with demand exceeding the final allocation by 5.4 times. Institutional demand came in 3.22 times the final allocation.

The final splits were as follows. 50% went to domestic institutions, 28% went to international institutions. 18% went to retail and 4% went to employees. Of the international tranche, 60% went to Asian investors and 40% went to Europeans.

Due to the oversubscription on the retail side, the company is holding a ballot this morning (Tuesday) to determine which applications have been successful. There will be no scaling back but rather names will be drawn until the full amount has been reached. This process will finish on August 9th when the final ballot will be completed. Successful applicants will then receive their shares and a cheque for the number of shares they own time one sen for the rebate. Unsuccessful bidders will receive nothing.

The company itself is a property investment holding company containing the assets of some of Kuala Lumpur's most famous buildings. The portfolio comprises the Twin Towers, the Mandarin Oriental hotel, Suria KLCC shopping mall, Menara Exxon Mobil, Compleks Dayabumi, a car park management company, a facilities management company and two vacant plots of land next to the Mandarin Oriental.

The corporate structure of KLCC Property Holdings (the listed company) is that it has bought shares in subsidiaries of parent KLCC Holdings in proportion to the amount of each property that KLCC Holdings owns. For instance, with the Mandarin Oriental Hotel, 75% of the building is owned by KLCC Holdings, and 25% by the Mandarin Oriental. Thus KLCC Property Holdings bought a 75% stake in the company that owns the hotel.

The listed company paid for these stakes with shareholder advances lent by KLCC Holdings and Petronas. The shares that are being listed are new shares but the proceeds from their sale will be used to repay these advances to the old shareholders. This gives the sale process the same effect as if old shares had been sold, in that the proceeds are ultimately going to the old shareholders. This rather convoluted structure was undertaken for tax considerations and due to the difficulties surrounding the co-owership of the actual properties.

From a valuation point of view, the company is being valued on a price earnings ratio of 12.46 times forecast 2005 earnings and a 23% discount to NAV. The company has a gross yield of 5.2%. It is difficult to find direct comparisons for these valuations as there are very few similar companies listed in Malaysia; most listed Malaysian property plays tend to be residential property companies.

As a result investors looked at the Singapore reit market for comps. In this comparison, KLCC Property Holdings comes out with a lower yield at 5.2% than the reits, which tend to yield between 7% and 8%. However, the company is forecast to grow its NAV by 10% a year, faster than the reits.

Moreover, the company gets huge support from its parent, Petronas, in terms of its annual revenues. 48% of KLCC Property's annual revenue comes from office space. 21% of the revenue comes from the retail space. 19% comes from the hotel and 12% comes from other sources. Of the 48% that comes from the office space, 87% comes directly from Petronas, which leases all the space in the Twin Towers and then sublets it to its tenants.

"This company offers better growth prospects than the reits," says one banker close to the deal. "And there is nothing really to compare it to on the Malaysian stock exchange in terms of the free float, the strength of the parent and the quality of the assets. It is the blue chip property stock that is listed on the Bursa Malaysia."

The question becomes why Petronas is willing to sell such profitable assets and give them so much support. It clearly does not need the money. Bankers close to the transaction say that the company is doing its bit for Malaysian investors and the Malaysian market by following the government's call to put good assets into public hands. It also allows Petronas a clearer focus when it comes to managing its property portfolio. However it is not clear that this deal is the first sign that Petronas might be willing to list itself. Many analysts believe that that deal, while possible, is still many years away.

KLCC Property will start trading on August 18th.