• Maintain BUY, with new MYR1.52 TP from MYR1.50, 28% upside and c.7% FY23F yield. Pavilion REIT announced that it has entered into a conditional sale and purchase agreement to acquire Pavilion Bukit Jalil (PBJ) from Regal Path for MYR2.2bn. PREIT will finance the acquisition with bank borrowings and two tranches of unit placements. With a 6.6% yield from the new asset, we are mildly positive on the acquisition – it should help to diversify the current reliance on Pavilion KL (PKL) and partly offset the impact of underperforming malls.

• Acquisition details. The total acquisition price of MYR2.2bn will be paid in stages and two tranches of unit placements. Upon the completion date, which we think it will be in 2Q23, PREIT will pay MYR1.65bn, comprising MYR1bn from bank borrowings, and MYR650m via cash proceeds from the first placement to the vendor. MYR150m will be paid upon the expiry of Defects Rectification Period (DRP) and upon issuance and delivery of the strata title which is targeted by end-2023. Finally, the balance MYR400m will be paid via cash proceeds from the second placement upon achieving a target net property income (NPI) of MYR146m on an annualised basis based on the latest six months historical NPI records. The structure of the deal is designed to target a 6.6% NPI yield while the new mall takes its time to get to full occupancy. Gearing level is expected to increase from 35% to 37% – still below the 50% limit stipulated by the Securities Commission.

• Pavilion Bukit Jalil is a suburban 5-storey retail mail with two basement car park levels. It is located within the integrated development of Bukit Jalil City, which comprises of six blocks of serviced apartments, shop offices, and other upcoming developments such as a Hyatt Place hotel which will be within 1km of the mall. PBJ has an NLA of 1,760,499 sqf, larger than PKL’s 1,347,361 sqf. As at 31 Oct, the mall has a committed occupancy of 78%.

• Mildly positive. Upon completion of the proposed acquisition, PBJ will represent 27% of the enlarged assets under management, and this will reduce the REIT’s dependence on PKL, which will see its contribution to the total asset value decrease from 82% to 60%. PBJ also offers more growth opportunities coming from a low base, as management guided that its current average rental per sqf is only in the high single digits, which is lower than the mid-teens of other suburban malls. However, we are cautious of the risk of competition in the sector due to the incoming supply of retail space, and a risk of a slowdown in retail sales due to the inflationary environment.

Source: RHB Research - 24 Nov 2022