PavREIT Elite acquisition positive in FY18

KUALA LUMPUR: Pavilion Real Estate Investment Trust’s (PavREIT) proposed acquisition of Elite Pavilion with Urusharta Cemerlang (KL) Sdn Bhd (UCKL) is only expected to be earnings positive in the financial year 2018 (FY18), analysts say.

PavREIT also announced the proposed acquisition of Elite Pavilion with UCKL and a vesting agreement with Urusharta Cemerlang Sdn Bhd (UCSB) and UCKL for the Extension Connections for RM580 million purchase consideration. Additionally, PavREIT also announced a conditional sales and purchase agreement (SPA) with UCSB for disposal of 10 car park bays for RM880,000.

“We believe asset net property income (NPI) yield is decent at 6.1 per cent considering tough market conditions compared with PavREIT’s intended target of 6.5 per cent, while Pavilion Mall NPI yield is six per cent (at FY16).

“The acquisition is expected to be completed in 4Q17 and will be funded by a combination of borrowings and 7.2 per cent placement,” said the research arm of Kenanga Investment Bank Bhd (Kenanga Research) in a recent report. All in, the research team is positive on this acquisition as it contributes circa eight per cent to FY18E earnings, and 7.6 per cent to distribution per unit (post placement). In a separate note, MIDF Amanah Investment Bank Bhd’s research arm is only slightly positive on this development.

It explained, “We are slightly positive on the acquisition as the acquisition is expected to be yield accretive whereby gross acquisition yield of 6.4 per cent is greater than financing cost of around five per cent.”

It noted that assuming PavREIT funds the acquisition from gross proceeds (RM370.6 million) from placement while the remaining from borrowings, it estimated the acquisition to increase FY18 earnings by 14 per cent.