PBJ acquisition likely to lift Pavilion-reit

Completion of sale scheduled for 2Q23

“Accounting for the expansion in the share base of about 33%, earnings per unit for FY22 is projected to increase by 3.3%.” HLIB Research

PETALING JAYA: Pavilion Real Estate Investment Trust’s (Pavilion-reit) proposal to buy Pavilion Bukit Jalil Mall (PBJ) is expected to enhance the fund’s portfolio performance in the medium term.

However, analysts are maintaining their ratings and earnings forecasts for Pavilionreit at the moment, pending the completion of the acquisition by the second quarter of next year and the private placement exercise to finance the acquisition.

Pavilion-reit said on Tuesday it had entered into a conditional sale and purchase agreement with Regal Path Sdn Bhd for the acquisition of Pavilion Bukit Jalil for an aggregate purchase consideration of Rm2.2bil.

It also proposed a private placement of Pavilion-reit units in two tranches to raise up to Rm1.27bil to part-finance the acquisition, which is expected to be completed in the second quarter of 2023.

According to MIDF Research, the acquisition of the retail mall in Bukit Jalil City in Kuala Lumpur is expected to be earnings-accretive for Pavilion-reit, potentially raising fund earnings and earnings per unit (EPU) by 37.9% and 3.3%, respectively, on an annualised basis post-acquisition and private placement.

However, the brokerage was “neutral” on the asset acquisition, as it was in line with Pavilion-reit’s strategy to expand its retail asset portfolio.

MIDF Research noted it made no changes to its earnings forecasts for Pavilion-reit for the financial year ending Dec 31, 2022 (FY22) and FY23, pending completion of the acquisition and private placement.

The brokerage maintained its target price of RM1.56 for Pavilion-reit with an unchanged “buy” call, citing improving outlook for the fund’s retail assets such as Pavilion KL, Elite Pavilion Mall and Intermark Mall, following the recovery in shopper footfall in tandem with the reopening of the economy.

Pavilion-reit’s distribution yield is estimated to be 5.8%, according to the company.

Meanwhile, Hong Leong Investment Bank (HLIB) Research was cautiously positive on the proposed acquisition of PBJ Mall, as it projected the asset to be accretive at a net property yield (NPI) of 6.6%, as compared to Pavilion-reit’s estimated NPI portfolio yield of around 6% for FY22.

“The deal is expected to enhance our FY22 forecast core net profit by 38.2%,” said HLIB Research.

“Accounting for the expansion in the share base of about 33%, EPU for FY22 is projected to increase by 3.3%.”

It reiterated its “hold” recommendation on Pavilion-reit with an unchanged target price of RM1.38, pending completion of its corporate exercises for the proposed asset acquisition.

Assuming the deal could be completed, HLIB Research said its target price for the fund would increase to RM1.43, based on the same valuation basis, while gearing was expected to increase to 37.6% from 34.8%.