Investment Highlights

• We maintain our HOLD recommendation on Pavilion REIT (PREIT) with an unchanged fair value of RM1.60 based on a forward target yield of 5.5%.

• PREIT has been formally invited to participate in the ownership of an ongoing development comprising one block of retail mall with five (5) levels of retail spaces and two (2) levels of basement parking to be provisionally known as Pavilion Bukit Jalil by Malton Bhd.

• PREIT had accepted the offer and both parties shall enter into an NDA to commence due diligence, discussions on method of participation and negotiate relevant terms and conditions.

• In 2017, The Edge Malaysia weekly reported that the Pavilion Bukit Jalil mall has a net lettable area of 1.8mil sq ft., and GDV of between RM1.4 billion and RM1.6 billion is expected to begin operations in 2020.

• PREIT’s debt-to-asset ratio increased to 28% following the RM580mil acquisition of Elite Pavilion Mall through 100% debt financing which was completed in 1QFY18. With the addition of Pavilion Bukit Jalil, we expect its debt-to-asset ratio will rise further to 46% (assuming 100% debt financing of RM1.6bil), nearing the regulatory threshold of 50%. Hence, we do not discount the possibility of equity financing to reduce its gearing.

• In an earlier statement, management noted that PREIT is targeting sales of RM1.7bil for the Pavilion Bukit Jalil mall in its first year of operations, and plans to differentiate the upcoming mall with new brands and concepts to attract shoppers in an increasingly competitive and crowded landscape.

• So far, management has not revealed financial information of the deal; hence we made no changes to our numbers. We maintain our FY18-20 earnings forecast at RM267.7mil, RM280.9mil and RM292.6mil respectively.

• We value PREIT at RM1.60 based on an unchanged forward FY18 target yield of 5.5%; implying forward PERs of 18.1x, 17.3x and 16.6x for FY19-20 respectively.

Source: AmInvest Research - 14 Aug 2018