Pavilion REIT (PREIT) has accepted Malton’s invitation to participate in the ownership of Pavilion Bukit Jalil Mall. We understand that the mall will have a NLA of 1.8m sf with a GDV of RM1.4-1.6bn and a target opening in 3Q2020. We are neutral on the announcement – the discussion is still preliminary and Pavilion Bukit Jalil mall has been widely viewed as an acquisition target for PREIT. Maintain BUY with an unchanged DDM-derived TP of RM1.84. At 6.3% 2019E yield, valuation looks attractive.

PREIT Accepts Malton's Invitation for Pavilion Bukit Jalil

PREIT has been formally invited by Malton to participate in the ownership of an on-going development provisionally known as Pavilion Bukit Jalil. The development comprises one block of retail mall with five levels of retail spaces and two levels of basement parking. PREIT had on 13 August 2018 accepted the invitation for both parties to enter into a non-disclosure agreement to commence due diligence, discussions on method of participation and to negotiate relevant terms and conditions.

Pavilion Bukit Jalil Mall Has 1.8m Sf of NLA, GDV of RM1.4bn-1.6bn

Based on an earlier article by EdgeProp, the Pavilion Bukit Jalil mall will have a net lettable area of 1.8m sf with a GDV of between RM1.4bn-1.6bn. The mall is set to open its doors in 3Q2020. In an August 2017 article by

The Star, Pavilion KL retail CEO Datuk Joyce Yap said the mall has received more than 1,000 registrations, and expected to hit an occupancy rate target of over 70% when it begins operations in 2020.

We Are Neutral on the Announcement

We are neutral on the announcement - the Pavilion Bukit Jalil mall has been widely viewed as an acquisition target for PREIT due to their common shareholder, Tan Sri Desmond Lim. Our preliminary assessment on the impact of acquisition (if materialised), based on information on various press articles: (i) Scale - PREIT currently own 4 retail malls with a combined NLA of 2.2m sf, the acquisition may lift its NLA by 82% to 4.0m sf; (ii) Funding - PREIT has RM2.1bn gross borrowings and RM6.3bn total asset value as at end-Jun18 (gearing ratio of 33.7%). With a debt-headroom of c.RM1bn, PREIT may need to issue new shares to fund this acquisition; (iii) Yields – it is premature to speculate but we estimate that the recently concluded acquisition of Pavilion Elite delivers a net property yield of c.6.5%.

Maintain BUY With An Unchanged TP of RM1.84

We maintain our BUY rating and DDM-derived price target of RM1.84. We like PREIT for its prime Pavilion KL Mall, strong branding and competent management team. PREIT is now trading at 6.3% 2019E distribution yield, +2SD above its historical average of 5.3%, looks attractive. Key risks to our positive view include weaker than expected average rental growth, higher than expected cost pressure, as well as unexpected hike(s) in interest rate.

Source: Affin Hwang Research - 14 Aug 2018