Highlights

A source was recently quoted in the Star Biz saying that Urusharta Cemerlang Sdn Bhd (UCSB), the Sponsor of Pavilion REIT, has commenced earthwork on the piece of land it bought for a record RM7,209 per sq ft three years ago, to put up a 50-storey block consisting of 39 floors of residential units (NSA: 310k sft) and 10 floors of retail space (NLA: 225k sft), with an expected combined RM800m GDV. After speaking to management, our key takeaways are:

A new vision for Bukit Bintang… Having spoken to management, we understand that PREIT’s chairman, Datuk Desmond Lim’s has a vision of a contiguous “Orchard Road” stretch on Bukit Bintang, interconnecting Pavilion Mall, the new extension wing and Farenheit 88 (F88).

All “connection capex” to be borne by the Sponsor… We understand that UCSB will fork out costs for all connection walkways, tunnels and bridges to realise its vision of creating the “Orchard Road” experience stretching from Pavilion Mall to F88. Given that the new wing is expected to be a separate and distinct structure by its own, we are expecting connection bridges and underground tunnels to provide seamless access for shoppers.

Smaller than expected? We were surprised to learn from the Starbiz news article that the new retail wing will only comprise 225k sft, instead of the nearly 300k sft guided previously by PREIT at the time of its IPO. However, we believe that this could be somewhat compensated by rental income from small stalls and advertising media revenue within the various connecting structures (details lacking at this juncture).

A key component… In light of his plans, we believe the injection of the Pavilion Mall extension wing will be only a question of time and injection yield. However, given the long gestation period, we expected F88 to be injected first.

Risks

Slowdown in the economy and consumer spending; delay in the MRT project execution (Bukit Bintang Station).

Forecasts

Maintained.

Rating

HOLD

• Positives: has the largest direct exposure to the superprime Bukit Bintang stretch via Pavilion Mall; strong branding and rental reversions; well-managed tenant mix.
• Negatives: Limited internal pipeline vs. Sunway REIT and CMMT; intensifying competition for third party retail assets; upside capped by premium valuations; limited free float.

Valuation

Given the yield compression trend taking place amongst the retail MREITs, we now upgrade our TP of PREIT from RM1.43 (4.8% target DY) to RM1.53 (4.5% target DY), and maintain our HOLD call on PREIT.

Source: Hong Leong Investment Bank Research - 15 Apr 2013