Investment Highlights

• We maintain BUY on Pavilion REIT (PREIT) with a lower fair value (FV) of RM1.51/unit (from RM1.59/unit previously) based on dividend discount model (DDM) and a neutral ESG rating of 3 stars (Exhibits 4, 5).

• MTrustee, the trustee of PREIT, has entered into a conditional sale and purchase agreement with Malton’s indirect subsidiary, Regal Path to acquire Pavilion Bukit Jalil (PBJ) for RM2.2bil (Exhibit 1).

• We raise our FY23F/FY24F distributable income estimate by 10%/14% to factor in the earnings contribution from PBJ. This is based on the assumption of 80% of occupancy rate, 5% of net property income yield and 4.8% effective interest rate.

• However, we lower our FY23F/FY24F distribution per unit (DPU) by 17%/14% to reflect the dilution of DPU assuming the issuance of additional 1.1mil units at RM1.20/share, through private placements to fund the acquisition.

• The proposed acquisition entails the acquisition of PBJ mall together with strategic link bridges and underpass, tenancies, car park bays, utilities and ancillary components.

• In addition, Pavilion REIT will also acquire additional movable assets required for the operations of PBJ, including laptops, buggies and mobile elevating work platforms costing RM3.4mil.

• To fund the acquisition cost, PREIT proposes to undertake a private placement exercise to raise up to RM1.3bil, with the issue price to be determined later through a bookbuilding exercise.

• The remainder RM900mil will be satisfied via a combination of term loans and internal funds. Meanwhile, Regal Path may receive new units to be issued by PREIT as partial settlement of the purchase consideration.

• We expect the group’s FY23F gearing ratio to rise to 0.38x from 0.35x assuming that RM900mil will be fully funded by debt.

• We believe that the purchase consideration is fairly valued after comparing the latest available appraised value of surrounding malls, Sunway Pyramid and The Mines within a 15km radius (Exhibit 2) of an average of price of RM1,423 per sq ft.

• The proposed acquisition is expected to be completed by 2QFY23. Upon completion of the proposed acquisition, PREIT’s property value will increase by 37% to RM8bil. This will largely reduce the reliance on Pavilion Kuala Lumpur’s contribution to PREIT’s total asset value to 60% from 82%.

• Meanwhile, the net lettable area of PREIT will rise by 77% to 4.2mil sq ft. Assuming 80% occupancy rate for PBJ, the group’s average occupancy rate is anticipated to remain stable at 80% post-acquisition.

• PBJ houses 5 levels of retail space, 2 levels of basement car park with 4,800 bays and a Piazza (centralised green area). It is a regional mall forming part of the 50-acre commercial integrated development of Bukit Jalil City.

• It is strategically located along Bukit Jalil Highway within the thriving suburb of Bukit Jalil. PBJ is situated 13km due south of the Kuala Lumpur City Centre, and surrounded by mature and well-established neighbourhoods such as Taman Overseas Union, Bandar Baru Seri Petaling, Taman Gembira (Kuchai Lama), Sungai Besi, Serdang and Kinrara.

• Over the last 6 months, PBJ registered an average of 1.2 million monthly footfall with an occupancy rate of 78%.

• PREIT intends to declare an advance distribution of its latest quarterly distributable income prior to the date of allotment of the placement units and consideration units (if any). This is to ensure that the distributable income accrued during the advance distribution period is only distributed to existing unitholders.

• PREIT currently trades at a compelling FY23F PE of 17x vs. its 2-year average (pre-pandemic FY18-19) of 19x. Meanwhile, FY23F distribution yield of 6% is attractive vs. 10-year MGS yield of 4%.

Source: AmInvest Research - 23 Nov 2022