Pavilion REIT has proposed to acquire Pavilion Bukit Jalil (PBJ) Mall from Regal Path Sdn Bhd for a consideration of RM2.2bn, to be satisfied via a combination of bank borrowings and proposed private placements. We are cautiously optimistic on the acquisition as PBJ Mall is expected to be accretive at net property yield (NPI) of 6.6%, as compared to Pavilion REIT’s FY22e NPI portfolio yield of c.6%. The deal is expected to enhance our FY22 forecasted core net profit by 38.2%. Accounting the expansion in the share base of c.33%, EPU for FY22 is projected to increase by 3.3%. Assuming the deal is to be completed, our TP would increase to RM1.43, based on the same valuation basis. Gearing shall increase to 37.6% (from 34.8%). We maintain our forecasts pending completion of the said corporate exercises. Reiterate HOLD with TP of RM1.38.

NEWSBREAK  

Pavilion REIT has entered into a conditional sale and purchase agreement with Regal Path Sdn Bhd (Regal Path) for the proposed acquisition of Pavilion Bukit Jalil (PBJ) Mall for a consideration of RM2.2bn, to be satisfied via combination of:  

1. Bank Borrowings Amounting to RM1.0bn;  

2. Proposed private placements of RM1.3bn via 1.1bn new Pavilion REIT’s units at an issue price of RM1.25/unit.  

Located at Bandar Bukit Jalil, Kuala Lumpur, PBJ Mall comprises a 5-storey retail mall with 2 basement car park levels with a total of 4.8k parking bays. PBJ Mall is a one year old building with an NLA of 1.8bn sqft. Its occupancy rate stands at 78%.

HLIB’s VIEW

Mildly positive. From our understanding, PBJ Mall is required to achieve a net property income (NPI) of at least RM146m on an annualised basis based on the latest six months historical NPI records (i.e. multiplied by 2) within 2 years from the completion date (2Q23 tentatively) in order for Regal Path to receive its final payment of RM400m. On that basis, we are cautiously positive on the acquisition as PBJ Mall is expected to be accretive at net property yield (NPI) of 6.6%, as compared to Pavilion REIT’s FY22e NPI portfolio yield of c.6%.

EPU impact. Based on our calculations, the deal is expected to enhance our FY22 forecasted core net profit by 38.2%. Accounting the expansion in the share base of c.33%, EPU for FY22 is projected to increase by 3.3%. Assuming the deal is to be completed, our TP would increase to RM1.43, based on the same valuation basis.

Financial position. Post-completion of the corporate exercises, gearing is expected to increase to 37.6% (from 34.8%) as at Dec 2021. This is still below the gearing limit of 50% (60% limit prescribed by Securities Commission to be lifted by 31 Dec 2022).  

To note, our estimates reflect: (1) the full dilution from the enlarged share base of 4.1bn units arising from the proposed private placement, (2) additional RM146m NPI contribution from PBJ Mall and (3) additional interest expenses arising from the net increase in borrowings from the said corporate exercises.

Forecast. We maintain our forecasts pending the completion of the acquisition.

Maintain HOLD, TP: RM1.38. We maintain HOLD with TP of RM1.38. Our TP is based on FY23 DPU on targeted yield of 5.5% which is derived from 5-year historical average yield spread between Pavilion REIT and 10 year MGS. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 23 Nov 2022