News

PAVREIT announced a sale and purchase agreement with The Intermark Sdn. Bhd. for the acquisition of Intermark Mall in Jalan Tun Razak, Kuala Lumpur for a total consideration of RM160.0m. The mall consists of 225,014sf of NLA and 367 car park bays.

Comments

We were not overly surprised with the acquisition as we had previously highlighted that PAVREIT has strong asset acquisition potential to which we have applied the thinnest spread to the MGS among MREITs under our coverage.

The total consideration is deemed relatively small as it only makes up an estimated 3.2% of PAVREIT’s total asset base post the acquisition of Damen Mall.

Valuation-wise, we believe the acquisition price is considerably fair as we believe the estimated cap rate of 6.1% is based on NPI margins of 68% (close to portfolio NPI margins of 69%) on annualised FY16E contributions of Intermark Mall (74% occupancy currently on rental of RM7.20 psf/month) (refer overleaf).

PAVREIT is funding the acquisition fully via borrowings and we expect FY16E gearing to increase to 0.25x post the acquisition (from 0.23x after acquiring Damen Mall), while financing cost will increase by 14.9% in FY16, after factoring in acquisition of Damen Mall.

All in, we are neutral-to-positive on this acquisition which we expect to be neutral to mildly positive to DPU in FY16 due to higher borrowing cost, which will negate the 9-month contribution from Intermark Mall. We expect the asset to be DPU accretive by FY17 from full-year GRI contributions. We estimate the acquisition to add 0.04 sen (0.49%) to FY16E DPU to 8.41 sen and add 0.24 sen (2.66%) to FY17E DPU to 9.10 sen.

Outlook

The Intermark Mall acquisition is expected to be completed in 1QCY16.

The Pavilion Extension should be completed by 2H16, while the fahrenheit88 acquisition is still on the table. Management may look to acquire fahrenheit88 if the cap rates are reasonable, i.e. closer to 6.5%.

Forecast

We leave FY15E unchanged but increase FY16E earnings by 0.4% to RM245.3m, with gross yields of 5.2-5.5% in FY15-16E (net: 4.7-4.9%).

Rating

Maintain OUTPERFORM

Valuation

We maintain our call but increase our TP to RM1.68 (RM1.67 previously) on FY16E GDPS of 8.4 sen (net: 7.6 sen). Our TP is based on an unchanged target gross yield of 5.0% on a +1.0ppt yield spread to our 10-year MGS target of 4.0%. We have applied the thinnest yield spread among MREITs under our coverage as we believe PAVREIT may be trading on thinner spreads based on expectations of future asset injections in FY16-FY17.

Risks to Our Call

Bond yield expansions.

Weaker-than-expected rental reversions.

Weak occupancy rates.

Source: Kenanga Research - 30 Dec 2015