INVESTMENT HIGHLIGHTS

• Placement of 218m new units is cancelled

• Gearing expected to increase to 33% from 26%

• Higher borrowing cost to partially offset contribution from Pavilion Elite

• Maintain Neutral with a lower TP of RM1.41 (from RM1.68 previously)

Placement of 218m new units is cancelled. The manager of Pavilion REIT has announced not to proceed with the previous proposal to issue 218 million new units, which represents 7.2% of the REIT’s existing number of units. The decision came about following the decline in Pavilion REIT’s unit price since the proposal of the corporate exercise.

Gearing expected to increase to 33% from 26%. Following the cancellation of the placement, the initial RM371m that was planned to be raised through placement will be funded through debt. Hence, we expect Pavilion REIT’s gearing level to rise to 33% from 26%.

Higher borrowing cost to partially offset contribution from Pavilion Elite. The proposed acquisition of Pavilion Elite has become unconditional following the issuance of the new title for the asset. Considering that the acquisition will be funded fully through debt, we expect the exercise to be completed by 2HFY18. While we expect Pavilion Elite to contribute about 4% to Pavilion REIT’s full year revenue, we estimate that the higher borrowing cost to partially offset the positive earnings contribution.

Earnings revised due to inclusion of Pavilion Elite and higher interest cost. We have also factored in lower rental reversion rates in view of the increasingly challenging market. More importantly, we estimate that the higher borrowing cost to affect its FY19F earnings by -10% to RM255m. Earnings estimate for FY18F was lowered to by -2% to RM252m in anticipation of lower rental reversion albeit the inclusion of Pavilion Elite.

Source: MIDF Research - 2 Apr 2018