- We re-affirm our HOLD recommendation on Pavilion REIT (PREIT), with an unchanged fair value of RM1.65/unit, based on our DCF valuation.

- Some details on the Pavilion Extension were reported in the local dailies today. To recap, the Extension is located between Pavilion KL and the Grand Millennium Kuala Lumpur Hotel. It is expected to be completed in three years.

- It was reported that the RM800mil-GDV tower block development will comprise a 50-storey building – 39 floors of residential units and 10 floors of retail space (Pavilion Extension).

- The Extension is said to have a retail space of 225,000sf of NLA. Given the high demand for retail space in Pavilion Mall, we understand rentals at the Extension will open in-line with market rates. This is further underpinned by the Extension’s complementary features, coupled with the maturity of Pavilion Mall, there years down the road.

- Having said that, the floor space for the units at the Extension will be larger (>2,000sf), underpinned by demand for larger retail space.

- Accessibility towards Pavilion Mall will improve tremendously. A walkway will be created to connect Pavilion KL, Fahrenheit 88, Banyan Tree Signatures and Harrods Hotel (located right between Pavilion KL and Banyan Tree Signatures).

- Management indicated that retail space will be created along the walkway between Pavilion KL and Fahrenheit 88. The tunnelling work on this walkway will only proceed upon completion of the tunnelling for the upcoming MRT.

- In addition, the residential area of this development will directly be connected to Pavilion KL and Fahrenheit 88.

- As such, the walkway is a great positive as footfall is bound to increase. We believe this could potentially translate into higher sales and in turn, extracting higher rentals from Pavilion Mall, moving forward.

- Although there is a possibility of Fahrenheit 88 being injected into PREIT in FY14F, we have not account for this in our earnings contribution. No change to our FY13F-FY15F earnings assumption.

- The sizeable pipeline of potential assets for PREIT injection include Fahrenheit 88, da:men mall in USJ and Pavilion Extension, with the tentative timeline in FY14F, FY15F and FY16F, respectively. The Extension will immediately be injected into PREIT upon completion.

- Along with it quality assets, we continue to like PREIT for its bright long-term prospects. Our HOLD call is premised on the limited upside to share price, given PREIT’s stellar performance.

Source: AmeSecurities