Highlight

• Acquiring WCT Malls… We understand that the management of WCT Berhad ( HOLD , TP RM1.95 ) is currently exploring to dispose its malls, namely AEON Bandar Bukit Tinggi (ABBT) and Paradigm Mall Petaling Jaya (PM) to PREIT. It is known that AEON BBT could fetch a value at RM500m and Paradigm Mall at RM700m and the deals could take place as soon as in 6 months’ time.

• Assets profile… PM, a 70:30 joint-venture with EPF has a NLA of 680k and 4.3k parking bays at 93% occupancy rate with average rental rate of RM6-8 psf. Meanwhile, ABBT has a NLA of 1m sq ft and 5k parking bays. The mall is currently leased to AEON Co. (M) Berhad ( SELL ; TP: RM2.20 ) at a lease term of 10 years ending Nov 2017 with an option to renew for another 3 terms of 5 years each.

• Challenging Suburb Malls… Based on the above quoted value and our back-of-envelope calculation, the potential new asset injections may not be yield accretive vs PREIT’s current yield circa 5%. Besides, we are wary of the challenging operating environment for suburb malls like PM, especially at the time PREIT is still digesting their recent acquisition of da:men and The Intermark.

• Plenty of room to raise debt… Assuming both acquisitions at RM1.2bn are done via debt, the gearing for PREIT could potentially rise to 39% based on our estimation, albeit still below the capping limit of 50%. However, we do not rule a cash call exercise given that the share price is currently trading at a yield below 5% vs its cost of debt at 4.4%.

• Portfolio mix… Ever since its IPO in 2011, it has been delivering positive performance year after year and is often valued at a more premium valuation given its success and status as a premium lifestyle mall at a superior location. However, the change of portfolio mix following the acquisition of da:men and The Intermark end of last year and potential upcoming acquisition of ABBT and PM will affect its traditional premium valuation at 1.3% spread to 10y-MGS (P/NAV of ~1.40). As a comparison, CMMT ( HOLD , TP: RM1.60 ), which holds mixture of retail malls is valued at 1.9% spread to 10y-MGS (P/NAV of ~1.2).

Risks

• Highly sensitive to downturn in consumer spending.

• Intensifying competition on retail space.

Forecasts

• Unchanged pending more clarity on the potential injections.

Rating

BUY ↔ , TP: RM1.95 ↔

• We like PREIT for its income growth potential in FY17 coming from Da:men and The Intermark and organic growth from positive rental reversion on 69% NLA expiry in FY16. However, we are wary with the impending injection of less than desired assets would drag its valuation and limit its potential to acquire more attractive and accretive assets.

Valuation

• Maintain BUY rating with unchanged TP of RM1.95 based on FY17 forecasted DPU.

• Targeted yield remains at 4.9% based on historical average yield spread of Pavilion REIT and 10-year MGS

Source: Hong Leong Investment Bank Research - 24 Nov 2016