Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily, on May 3, 2016.

 

Pavilion Real Estate Investment Trust
(April 29, RM1.67)

Maintain buy with a higher target price (TP) of RM1.75: Pavilion Real Estate Investment Trust’s (REIT) da:men USJ mall opened its doors on Jan 8 with more than 50% occupancy. Its management is positive about the mall’s prospects as occupancy has since reached 85% and the acquisition was completed in the first quarter of 2016 (1Q16). Another Pavilion REIT’s acquisition — Intermark Mall for RM160 million — was also completed in 1Q16. Expecting contributions from 2Q16 onwards, we estimate da:men USJ and Intermark Mall to generate net property income of RM31.1 million (up 9.8%) in financial year 2016 forecast (FY16F) and RM42.4 million (up 11.1%) in FY17F. In our view, Pavilion REIT is likely to continue its acquisition trail with the soon-to-be-completed Pavilion Extension, to which it has the right of first refusal (RoFR).

Pavilion REIT’s core asset is the 1.3 million-sq ft net-lettable-area (NLA) Pavilion Kuala Lumpur mall, located strategically in the heart of the Bukit Bintang shopping district in Kuala Lumpur. The premium profiling and location have led to a strong average rental rate of above RM20 per sq ft, as well as justified its premium valuation over other large-cap Malaysian REITs.

Pavilion REIT has more RoFRs to prime assets. The two remaining RoFR assets are the 250,000-sq ft NLA Pavilion Extension and the 300,000-sq ft Fahrenheit88 mall, currently held by major shareholders of Pavilion REIT. Both could see valuations around or above the RM600 million to RM700 million range due to their prime location near Pavilion Kuala Lumpur, which can support rental rates of over RM20 per sq ft a month. We have imputed the Pavilion Extension acquisition in FY17, though we conservatively forecast a low initial distribution per unit (DPU) accretion of below 1%.

Rolling forward our valuation base, we derive a TP of RM1.75, based on the dividend discount model with 7.4% cost of equity and 1.5% TG. We also introduce our FY18 figures. We reiterate our “buy” recommendation on the basis of potential DPU accretion from the proposed acquisition of Pavilion Extension.

A key risk to our view is underperformance of new assets. We base our assumptions on the positive performance of the acquisitions and we forecast both to be immediately accretive. In the event the new assets underperform due to lower-than-expected occupancy levels and rental reversions, its earnings may come in below our expectations. — AllianceDBS Research, April 29

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