PavREIT yesterday announced the proposed acquisition of Da:men USJ, a retail shopping mall located in Subang Jaya, Selangor. Maintain NEUTRAL with our DDM-based TP raised to MYR1.69 (from MYR1.55, 9% upside) post-earnings revision. We view the acquisition positively as it may help drive earnings further and provide revenue diversification. PavREIT aims to complete the injection by 1Q16.

Proposed acquisition of Da:men. Pavilion REIT (PavREIT) yesterday announced the proposed acquisition of Da:men USJ, a retail shopping mall located in USJ 1, Subang Jaya, Selangor, for a total purchase consideration of MYR488m. The acquisition value implies a net yield of 7.2%, which we think is decent. The asset, which will be funded entirely through debt, will be earnings-accretive and increase its gearing to only 23% from c.15%. The mall is expected to commence operations in Nov 2015, while the acquisition is expected to be completed by 1Q16.

Asset details. The asset is a 5-storey shopping mall with a net lettable area (NLA) of 420,920 sq ft and two levels of basement car parking with 1,672 parking bays. The main anchor tenants for the mall would be Jaya Grocer and other food and beverage (F&B) players such as PappaRich. The mall will cater to residents of the serviced apartment and the USJ residential area within its locality. Management also shared that the injection of Da:men -- as opposed to that of Fahrenheit 88 -- was mainly due to the latter having demanding valuations while its rental has yet to meet management’s expectations.

Forecasts. We make no changes to our FY15 earnings forecast. However, we lift our FY16-17 earnings estimates by 7.6-8% after imputing 9-month revenue contribution from the acquisition in FY16 and full-year contribution in FY17. We assume 85% and 90% occupancy rates in FY16-17. DPU also grows by 7.2-7.9% in FY16-17 from our previous forecasts post-revision.

Maintain NEUTRAL. Following the acquisition and earnings revision, we raise our DDM-based TP to MYR1.69 (from MYR1.55). We think the acquisition of Da:men will not only contribute positively to the REIT’s future net property income, but also provide an avenue for revenue diversification. We maintain our NEUTRAL call on PavREIT for now, as yesterday’s share price increase has partly reflected the positive reception to the acquisition.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Pavilion REIT is a retail-focused REIT in Malaysia and the owner of the iconic Pavilion KL Mall.

Recommendation Chart

Source: RHB Research - 18 Sep 2015