(Jan 8, RM1.53)
Upgrade to buy with a target price (TP) of RM1.70: After the proposed acquisition of da:men USJ for RM488 million in September 2015, Pavilion Real Estate Investment Trust (PavREIT) recently announced the planned acquisition of Intermark Mall for RM160 million.
Assuming contribution from the second quarter of 2016 onwards, we estimate da:men USJ and Intermark Mall to generate net profit interests of RM31.1 million (up 9.8%) in financial year 2016 (FY16) and RM42.4 million (up 11.1%) in FY17.
In our view, PavREIT is likely to continue its acquisition trail with the soon-to-be-completed Pavilion Extension, to which it has the right of first refusal (ROFR). We upgrade our recommendation to “buy” for PavREIT, following the distribution per unit (DPU) accretion from the proposed purchases, which elevates it among its M-REIT peers.
PavREIT’s core asset is backed by premium assets such as the 1.3 million sq ft net lettable area (NLA) Pavilion KL mall, located strategically in the heart of the Bukit Bintang shopping district in Kuala Lumpur. The premium profiling and location have led to strong average rental rates of above RM20 per sq ft (psf), as well as justifying a premium valuation over other large-cap M-REITs.
The two remaining ROFR assets are the 250,000-sq ft NLA Pavilion Extension and 300,000-sq ft Fahrenheit88 mall, currently held by major shareholders of PavREIT. Both could see valuations around or above the RM600 million to RM700 million range due to their prime location near Pavilion KL, which can support rental rates of more than RM20 psf per month.
We have imputed the Pavilion Extension acquisition in FY17, though we conservatively forecast a low initial DPU accretion of less than 1%.
Rolling forward our valuation base, we derived a TP of RM1.70, based on a dividend discount model with a 7.4% cost of equity. We revised our earnings estimate by 0.4%/1.0% in FY16/FY17 to impute the acquisition of Intermark Mall in FY16.
This article first appeared in The Edge Financial Daily, on January 11, 2016. Tap here to subscribe for your personal copy.