KEY INVESTMENT HIGHLIGHTS

• Acquisitions of Banyan Tree KL and Pavilion Hotel KL
• Private placement to fund the acquisitions
• Diversification into hotel segment
• Earnings accretive but EPU will be diluted post placement
• Earnings forecast maintained
• Maintain BUY with an unchanged TP of RM1.69

Acquisitions of Banyan Tree KL and Pavilion Hotel KL. Pavilion REIT announced that it has entered into a conditional sale and purchase agreement for the acquisition of Banyan Tree KL for RM140m and Pavilion Hotel KL for RM340m. That brought total purchase consideration to RM480m. Pavilion REIT also proposed to undertake placement of new units in Pavilion REIT to raise gross proceeds of a minimum RM264m and a maximum of RM552m at an issue price to be determined by way of bookbuilding. Pavilion REIT also proposed issuance of consideration units in Pavilion REIT to part settle RM246.5m of the purchase consideration in the event Pavilion REIT elects not to implement the proposed placement.

Diversification into hotel segment. The proposed acquisitions of Banyan Tree KL and Pavilion Hotel KL mark the diversification of Pavilion REIT asset portfolio into hotel segment. Note that 99% of net property income of Pavilion REIT was contributed by retail assets. We view the diversification into hotel segment positively considering the recovery of hotel industry in Malaysia which is driven by higher tourist arrivals. Both Banyan Tree KL and Pavilion Hotel KL are five-star hotels with decent occupancy rates of 83% and 82% respectively. The proposed leases of the hotels are for a term of 10 years with an option to renew them for a term of 10 years. The fixed annual rental payments for the hotels are RM33.5m, translating into a gross yield of 7% which is deemed attractive.

Gearing based on different scenarios. Gearing of Pavilion REIT is expected to remain at 0.42x post-acquisition assuming issuance of consideration units in Pavilion REIT to vendors while the remaining purchase consideration to be funded via bank borrowings. On the other hand, gearing is expected to reduce to 0.39x from 0.42x based on scenario of placement of shares (maximum placement scenario of 386m shares issue at illustrative issue price of RM1.43 per unit) as Pavilion REIT earmarked RM80m from placement proceeds for bank borrowings aside from utilising the proceeds for the acquisitions. Meanwhile, under scenario of minimum placement (184.6m shares issue at illustrative issue price of RM1.43 per unit) gearing of Pavilion REIT is expected to remain flattish at 0.42x.

Maintain BUY with an unchanged TP of RM1.69. The acquisition is earnings accretive as earnings contribution from Banyan Tree KL and Pavilion Hotel KL are expected to lift FY26 earnings by 10.6%. Nevertheless, earnings per unit (EPU) is expected to dilute by ~9% post placement of shares (based on maximum scenario). Nevertheless, we maintain our earnings forecast pending completion of the acquisitions. We also maintain our TP for Pavilion REIT at RM1.69, based on Dividend Discount Model. We maintain our BUY call on Pavilion REIT as we continue to see better earnings outlook for Pavilion REIT, driven by stable contribution from Pavilion KL Mall on the back of positive rental reversion and strong shopper footfall.

Besides, the growing contribution from Pavilion Bukit Jalil provides upside to the earnings growth. Meanwhile, net distribution yield remains attractive at 5.4%.

Source: MIDF Research - 6 Dec 2024