PavREIT has announced the proposed injection of The Intermark retail asset for MYR160m. Maintain BUY with a raised MYR1.75 TP (from MYR1.69, 14% upside). We are positive that the deal would be DPU-accretive as: i) it is likely to be financed through debt, and ii) its strategic location. Overall, the impact to earnings is expected to be <5% given the mall’s smallish size vs PavREIT’s MYR5.1bn asset size.

Acquiring The Intermark. Pavilion REIT (PavREIT) has announced a proposal to acquire The Intermark mall along Jalan Tun Razak for a purchase consideration of MYR160m. The mall has total NLA of 255,014 sq ft. We believe that the net yield of 6.1% for the 3-year old mall is fair, given its prime location along Jalan Tun Razak and direct access to the Integra and Vista office towers. We note that the 74% occupancy rate is lower than its other portfolio assets, although we see this as an opportunity for the REIT to bring in high-yielding tenants. The purchase would be fully-funded by debt, and coupled with the MYR488m of debt for the purchase of da:men in USJ, could see its gearing breach the 25% mark (FY15:15%). However this still sits comfortably below the 50% gearing cap set by the Securities Commission (SC). Management expects the acquisition to be completed by end-1Q16.

Smallish injection, but still yield-accretive. The deal has caught us by surprise as it comes not too long after its proposed acquisition of da:men in USJ in September (see Pavilion REIT : First Acquisition After Listing). We note that the acquisition would be earnings- and DPU-accretive upon completion, given that the mall already has a relatively stable tenancy mix. We note that currently F&B tenants take up about 36% of NLA, with other notable tenants being Jaya Grocer and Sports Direct. The mall has a decent catchment from the surrounding offices and also accessibility to the nearby Ampang Park LRT station, which should lift future prospects. That said, the mall only makes up about 3% of PavREIT’s estimated MYR5.1bn investment asset value.

Maintain BUY. Our FY16F-17F earnings are lifted by <5% after adjusting for higher revenue and interest expenses going forward. Our DDM-based TP is raised to MYR1.75 after our earnings revision. Despite the current weak consumer sentiment, PavREIT is likely to still be able to sustain its DPU growth over the next 12 months due to its inorganic growth potential. Key risks to our call include prolonged weak consumer sentiment and competition from newer malls.

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Company Profile

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

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Source: RHB Research - 30 Dec 2015