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Pavilion REIT needs new assets for excitement

Pavillion REIT (July 5, RM1.28)
Recommend neutral at a target price of RM1.22:
Pavilion Real Estate Investment Trust (Pavilion REIT) is the second largest REIT in Malaysia with total assets of RM3.6 billion (as at the first quarter of financial year 2012) and market capitalisation of RM3.6 billion (as at July 4).

The liquidity of Pavilion’s units is the second highest among the six REITs with a market cap more than RM1 billion. Since its listing in December, Pavilion’s share price has increased by 36%, while distribution yield moved inversely from more than 6% to 5.1%.

Forecast distribution yield of 5.1% is one of the lowest among Malaysian REITs (M-REITs). Pavilion REIT comprises primarily Pavilion Kuala Lumpur Mall and Pavilion Tower, an office block next to the mall. Pavilion Mall’s appraised value is about RM3.4 billion, which offers the largest exposure to retail assets among all M-REITs.

Pavilion Tower only accounted for 3.6% of the total asset value and contributes less than 5% of revenue. Pavilion Mall is an integral part of the well-known Bukit Bintang retail district.

A variety of hotels, retail malls and commercial buildings complement one another to create a vibrant shopping and commercial environment. Apart from being a tourist hotspot, Bukit Bintang also serves the local population from the whole of the Klang Valley, estimated at about six million.

The wholesale and retail sector was envisaged to be the second biggest contributor to gross national income (GNI) among the 12 National Key Economic Areas (NKEAs) announced under the Economic Transformation Programme (ETP).

In the past few years, regardless of economic conditions, private consumption has consistently accounted for 45% to 50% of GDP. Pavilion’s future earnings are expected to be resilient due to the focus on retail focus, limited prime retail malls in the Klang Valley as well as the strategic location of Pavilion Mall.

Competition in the retail industry will intensify with the opening of 16 new malls in the Klang Valley by 2014. Nevertheless, we expect minimum impact on Pavilion as the bulk of these will be located in the suburbs.

Furthermore, Pavilion Mall’s position as one of the foremost prime retail malls in Malaysia is attested to by the multiple awards garnered by the management team. — MIDF Research, July 5

This article appeared in The Edge Financial Daily July 6, 2012.

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