- We upgrade our rating on Pavilion REIT (PavREIT) from a
HOLD to a BUY and raise our fair value to RM1.33/unit (vs. RM1.15/unit previously)
based on a 5% discount to our DCF value of RM1.40/unit.
- Following a meeting with the management, we raise our earnings
estimates for FY12F and FY13F by 1% and 2%, respectively, translating into a
marginally higher DPU of 6.2 sen and 7.3 sen, underpinned by organic growth and
acquisition. We assume a 99% payout ratio.
- The Fashion Avenue (NLA: 68,000sf) is targeted to be
opened by early September 2012. So far, there is a circa 90% of precommitted tenants. The full impact of
the Fashion Avenue and an estimated average rental rate of RM16psf, compared
with under-RM10psf previously, would be seen in FY13F.
- Additionally, at least 67% of tenants are due for renewal
in FY13F. We expect a 12%-15% rental reversion because tenants are committed to
a 3-year tenancy during the infant stage of the mall. In our model, we forecast
a higher weighted average rental rate of RM19psf for FY13F, vs. RM17psf for
FY12F.
- In order for Pavilion Mall to sustain its attractiveness,
circa 5% of the tenants are changed on a yearly basis to provide a fresher appeal
and a newer look to the mall. Tenants are also required to refurbish their
space every 6 years.
- Elsewhere, management expects Farenheit 88 to stabilise
its tenancy within 3 years by FY13F. PavREIT would acquire the mall if the
owner decides to sell. As such, this may be PavREIT’s first asset injection
that could take place by FY14, given that the mall is deemed fit.
- Pavilion extension (NLA:250,000sf, GFA:4,000sf), which
consists of up to 8 levels, will be
adjoining the existing mall at levels 1, 2 and 3. Additionally, the mall’s
appeal would be enhanced by a proposed glass-covered structure running from La
Bodega towards the fountain. The extension is currently in the soil testing
stage. Construction is to begin in 3QFY12. Management intends to acquire the
extension immediately upon completion in FY16.
- As Pavilion mall took a year to stabilise the tenancy, the
extension is expected to take 6 months, given the maturity of the mall.
Management expects full tenancy for the extension, underpinned by a long
waiting list of over 400 applicants.
- Management targets a distribution growth of 5%
organically. However, FY13F will be an exceptional year, and as such, we are shifting
our valuation basis to FY13F. Given this, PavREIT is attractive and we expect
more news flow to excite the market. At current level, PavREIT has a dividend
yield of 5.4% and 6.4% (vs CMMT: 5.6% and 5.9%) for FY12F and FY13F,
respectively, and DPU growth of 18% in FY13F; hence, our BUY rating.
Source: AmeSecurities
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