News

• In an announcement to local bourse, PREIT is proposing to dispose an area measuring 1,050 sq m, including 72 parking bays in Pavilion Mall for a cash consideration of RM4.9m from Urusharta Cemerlang (KL) Sdn Bhd (UCKL).

• UCKL also issued a letter of undertaking to leaseback 66 car park bays to PREIT for a period of nine years at a proposed monthly rental of RM16,500 or RM250 per car park bay per month.

• The proposal is expected to be completed in 2H15.

Comments

• We are neut ral on the news as the affected area is just 0.9% of total mall’s NLA while the affected car park area value is estimated only 0.1% of PREIT’s total asset value.

• We understand that the rationale for this disposal is to provide Pavilion Mall better connectivity with Pavilion Extension - consist of 10 floors of retail and F&B. Note that PREIT already secures first-right of refusal for Pavilion Extension from its sponsor, UCKL.

• Proceed from the disposal will be utilised to finance asset enhancement exercises or to meet operational needs.

Risks

• Limited portfolio diversification (in terms of market segment) and internal pipeline
• Intensifying competition
• Exposure to rising inflation.

Forecasts

• Unchanged.

Rating

HOLD , TP: RM1.47

Positives:

• Enjoys the largest direct exposure to the super-prime Bukit Bintang stretch via Pavilion Mall.
• Strong branding and rental reversions.
• Well-managed tenant mix.

Negatives:

• Over-supply of office space in Klang Valley.
• Negatives consumer sentiment as a result of subsidies rationalization initiatives and GST implementation.

Valuation

• Maintain HOLD recommendation on the equity and unchanged TP of RM1.47.
• Targeted yield remains at 5.7%, derived from historical average yield spread of Pavilion REIT and 7-year MGS.

Source: Hong Leong Investment Bank Research - 2 Jul 2015