Malaysia Company Guide Pavilion REIT
Version 9 | Bloomberg: PREIT MK | Reuters: PREI.KL Refer to important disclosures at the end of this report
DBS Group Research . Equity 27 Jul 2018
HOLD (Downgrade from BUY) Fairly valued Last Traded Price ( 26 Jul 2018): RM1.65 (KLCI : 1,766.23) Price Target 12-mth: RM1.70 (3% upside) (Prev RM1.65) Downgrade to HOLD with higher TP of RM1.70. PavREIT’s share price has rebounded by 15% following our recommendation Analyst upgrade on 27 April. Given the limited upside to our target Siti Ruzanna Mohd Faruk +603 2604 3965 [email protected] price at this juncture, we downgrade our call to HOLD. Earnings will continue to be supported by the newly acquired Pavilion Elite which has occupancy rates of 96.2% as well as positive What’s New rental reversions from Pavilion Kuala Lumpur. There are signs 1HFY18 earnings in line with expectations that consumer spending has picked up in the last two months. Sustained improvement in consumer spending would support Benefited from newly acquired Pavilion Elite as well as stronger rental reversions. steady performer Pavilion Kuala Lumpur
NPI margins remained steady at 67% despite higher Where we differ: Our forecast is higher than consensus as we costs have higher rental reversions for Pavilion Kuala Lumpur. We Downgrade to HOLD with higher TP of RM1.70 expect the mall to perform better following its tenant
repositioning exercise.
Potential catalyst: Acquisition growth from Fahrenheit88. Price Relative PavREIT has the right of first refusal (ROFR) to acquire the 300k sq ft Fahrenheit88 mall, currently owned by PavREIT’s major shareholder. We expect to see valuations at the RM600-700m range due to its prime location near Pavilion Kuala Lumpur.
Valuation: Our DDM-derived TP increases to RM1.70 as we roll forward
our base year. Our valuation factors in 7.5% cost of equity and Forecasts and Valuation 1.50% terminal growth. At its current share price, the stock FY Dec (RMm) 2017A 2018F 2019F 2020F Gross Revenue 490 576 605 626 offers 5.2% net yield. Net Property Inc 323 375 394 414 Total Return 249 253 268 287 Key Risks to Our View: Distribution Inc 249 262 278 296 Rental reversions. Our imputed reversion expectation for EPU (sen) 7.66 8.33 8.83 9.41 EPU Gth (%) (2) 9 6 7 Pavilion Kuala Lumpur is conservative at 5% for the c.5% of DPU (sen) 8.24 8.55 9.04 9.62 leases expiring in FY18. Significantly lower rental reversions will DPU Gth (%) 0 4 6 6 be a key risk. NAV per shr (sen) 130 130 129 129 PE (X) 21.5 19.8 18.7 17.5 At A Glance Distribution Yield (%) 5.0 5.2 5.5 5.8 Issued Capital (m shrs) 3,035 P/NAV (x) 1.3 1.3 1.3 1.3 Aggregate Leverage (%) 25.9 32.6 32.6 32.7 Mkt. Cap (RMm/US$m) 5,007 / 1,232 ROAE (%) 5.9 6.4 6.8 7.3 Major Shareholders (%) Qatar Holdings 36.1 Siew Choon Lim 28.2 Distn. Inc Chng (%): 0 0 0 Yong Tan Kewi 9.4 Consensus DPU (sen): 8.30 8.90 9.30 Free Float (%) 26.3 Other Broker Recs: B: 2 S: 0 H: 9 3m Avg. Daily Val (US$m) 0.51 Source of all data on this page: Company, AllianceDBS, Bloomberg ICB Industry : Financials / Real Estate Investment Trust Finance L.P
ed: CK / sa:WMT, CW, CS Company Guide
Pavilion REIT
Potential upside from new acquisition plan. PavREIT’s core asset WHAT’S NEW is Pavilion KL Mall. The premium tenant profile and location Earnings came in within expectations have led to strong average rental rates of above RM20psf. 2QFY18 distributable income came in at RM62.0m (+5.7% PavREIT has completed its acquisition of the 242k-sq-ft Pavilion y-o-y) which brings 1HFY18 net distributable income to Elite for RM580m which has been contributing positively to the RM131.7m (+9.9% y-o-y). This is in line with our and group. Another asset to which PavREIT has the right of first consensus estimates. refusal (ROFR) is the 300k-sq-ft Fahrenheit88 mall, currently Declared 4.34 sen dividend for 1HFY18 which implies full owned by PavREIT’s major shareholder. We expect to see payout. valuations at around or above the RM600-700m range due to Revenue rose by 12.3% y-o-y to RM135.1m, mainly its prime location near Pavilion KL, which can support rental contributed by the newly acquired mall Pavilion Elite that rates of >RM20psf/mth. raked in RM11.9m. Better revenue is also supported by higher rental income from Pavilion Kuala Lumpur as well as Valuation higher occupancy rates in Intermark Mall. Our DDM-derived TP increases to RM1.70 as we roll forward NPI margins remained steady at 67.1% in 2QFY18 as our base year, with 7.5% cost of equity and 1.50% terminal higher operating costs in Pavilion Elite was offset by lower growth. However, we downgrade our BUY call to a HOLD as costs in da:men and Intermark Mall. the share price has rebounded following our BUY call on 27 April. We believe stock has limited upside at this juncture. Outlook
Quarterly / Interim Income Statement (RMm) FY Dec 2Q2017 1Q2018 2Q2018 % chg yoy % chg qoq
Gross revenue 120 132 135 12.3 2.7 Property expenses (43.5) (42.5) (44.4) 2.1 4.5 Net Property Income 76.7 89.0 90.6 18.1 1.8 Other Operating expenses (6.9) (7.3) (7.8) 12.5 6.1 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 N/A N/A Net Interest (Exp)/Inc (15.4) (16.4) (22.1) (43.0) (35.0) Exceptional Gain/(Loss) 0.0 0.0 0.0 N/A N/A Net Income 54.4 65.4 60.8 11.8 (6.9) Tax 0.0 0.0 0.0 N/A N/A Minority Interest 0.0 0.0 0.0 N/A N/A Net Income after Tax 54.4 65.4 60.8 11.8 (6.9) Total Return 54.4 65.4 60.8 11.8 (6.9) Non-tax deductible Items 4.25 4.40 1.16 (72.8) (73.7) Net Inc available for Dist. 58.7 69.7 62.0 5.7 (11.2) Ratio (%) Net Prop Inc Margin 63.8 67.7 67.1 Dist. Payout Ratio 100.0 0.0 100.0
Source of all data: Company, AllianceDBS
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Company Guide Pavilion REIT
Net Property Income and Margins (%) CRITICAL DATA POINTS TO WATCH Rental reversion pace to moderate. The positioning and good location of the Pavilion Kuala Lumpur mall (PKL) with net lettable area (NLA) of 1.3m sq ft enables the asset to deliver strong rental reversions on expiring tenancies. However, we expect the rental reversion pace to moderate ahead, as the weaker consumer sentiment continues to hurt retail sales. There are already visible signs – average rent had increased by a slower 4% in 2017 from 15% in 2013 because of a more challenging retail market. We expect reversion rates to continue to be pressured in FY18/19F at c.5%. PKL normally registers peak occupancy levels of above c.98% because of its much sought-after location. And occupancy should Net Property Income and Margins (%) remain stable as retailers would want to maintain a presence in the key Bukit Bintang shopping district even if there is a temporary slowdown in spending. Leases representing 5% of NLA will be expiring in 2018.
Newly added assets to improve. PavREIT completed two acquisitions in FY16 namely da:men and Intermark Mall. NPI from both da:men and Intermark Mall has been fairly decent at RM28.7 for FY17. In our forecasts, we assumed occupancy of 90%/90% in FY18/19F, as management works towards its target of near-full occupancy; and imputed a reversion rate of 3% on expiring leases for these two Distribution Paid / Net Operating CF assets due to their moderate rental rates despite the good locations. We estimate da:men USJ and Intermark Mall to generate NPI of RM36.8m in FY18F.
Similar asset from Sponsor. PavREIT completed its acquisition of Pavilion Elite in April from Urusharta Cemerlang (KL) Sdn Bhd, a property development firm controlled by PavREIT’s major shareholder Tan Sri Desmond Lim Siew Choon. PavREIT has acquired the asset for RM580m which is funded via borrowings. The asset is a 10-storey, c.242k-sq-ft NLA retail development next to PKL. It shares the same design quality as the latter and is connected via an underground walkway. In our forecasts, we Interest Cover (x) imputed NPI of c.RM14m from the Pavilion Elite acquisition in FY18, based on an NPI yield of 6.35%.
Minor office exposure. PavREIT also owns the 165k-sq-ft NLA Pavilion Office Tower, which contributes c.2% to its topline and NPI. It is currently about 98% occupied and its major tenants include Malton Group, Mrail International, Clever Eagle, Crabtree & Evelyn and KL Metro.
Source: Company, AllianceDBS
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Company Guide
Pavilion REIT
Appendix 1: Factors driving historical share price performance
Indexed at Jun 12 PREIT MK 10Y MGS FBMKLCI Acquisition 175
Share price performed as 10Y Announced SPA for MGS yield dropped Elite Pavilion Mall 150 Announced SPAs for Intermark Mall and da:men USJ Shopping Mall
125
100
75 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18
Source: Company, AllianceDBS, Bloomberg Finance L.P. PREIT share price versus 10Y MGS Yields Remarks
RM % Interestingly, PREIT’s share price and the 2.00 4.80 10Y MGS yields have minimal correlation 1.90 over an extended period. However, we note 1.80 4.40 that the negative correlation is particularly 1.70 strong during periods of rising or declining 1.60 1.50 4.00 bond yields which may explain investors’ 1.40 preference for REITs as a defensive play. 1.30 3.60 1.20 1.10
1.00 3.20
Jul-12 Jul-17
Jan-15
Jun-15
Oct-13
Apr-16
Sep-16 Feb-12 Feb-17
Dec-12 Dec-17
Aug-14
Nov-15
Mar-14
May-13 May-18 PREIT MK (LHS) 10Y MGS (RHS) Source: Company, AllianceDBS, Bloomberg Finance L.P.
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Company Guide Pavilion REIT
Aggregate Leverage (%) Balance Sheet: Set to gear up to pursue non-organic growth. PavREIT’s gearing level has historically been below 18% vs 25-35% for other Malaysian REITs. But this has risen to 32% with the fully debt- funded da:men Mall, Intermark Mall and Pavilion Elite purchases.
Share Price Drivers: Acquisition newsflow. PavREIT is gaining appeal among investors due to the proposed acquisitions in its pipeline. Confirmation of earnings enhancing acquisitions at attractive yields will be key re-rating catalysts for the stock. ROE (%)
DPU growth, higher rental reversions. Currently, we forecast the occupancy level to average at 96% and rental reversion rate of 4-5%. An improvement in the occupancy level and rental reversion rate will lift DPU, which would translate into a higher unit price.
Key Risks: Rental reversion of current portfolio. Our imputed reversion expectation for Pavilion Kuala Lumpur is conservative at 5% for the c.5% of leases expiring in FY18. Significantly lower rental reversions will be a key risk. Distribution Yield (%)
Company Background Pavilion REIT is a retail-focused real estate investment trust, its primary asset being the Pavilion Kuala Lumpur mall – a 1.3m- sq-ft net lettable area shopping centre nestled in the shopping district of Jalan Bukit Bintang, Kuala Lumpur.
PB Band (x)
Source: Company, AllianceDBS
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Company Guide
Pavilion REIT
Key Assumptions FY Dec 2016A 2017A 2018F 2019F 2020F
Portfolio lease expiry (% 45.8 14.5 10.3 37.6 13.2 NLA) Pavilion KL reversion (%) 9.00 4.00 5.00 5.00 5.00
Income Statement (RMm) FY Dec 2016A 2017A 2018F 2019F 2020F
Gross revenue 460 490 576 605 626 Property expenses (145) (167) (202) (211) (212) Net Property Income 315 323 375 394 414 Other Operating expenses (27.2) (28.2) (38.1) (38.2) (38.3) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (52.3) (62.6) (83.8) (87.5) (88.6) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
Net Income 235 232 253 268 287
Tax 0.0 0.0 0.0 0.0 0.0
Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Income After Tax 235 232 253 268 287 Total Return 312 249 253 268 287 Non-tax deductible Items 13.5 17.3 9.31 9.33 9.36 Net Inc available for Dist. 249 249 262 278 296 Growth & Ratio Revenue Gth (%) 11.1 6.6 17.6 5.0 3.4 N Property Inc Gth (%) 8.0 2.6 16.0 5.2 4.9 Net Inc Gth (%) (2.5) (1.3) 8.9 6.2 6.8 Dist. Payout Ratio (%) 100.0 100.1 99.0 99.0 99.0 Net Prop Inc Margins (%) 68.5 65.9 65.0 65.1 66.1 Net Income Margins (%) 51.2 47.4 43.9 44.4 45.8 Dist to revenue (%) 54.1 50.9 45.5 45.9 47.3 Managers & Trustee’s fees 5.9 5.8 6.6 6.3 6.1 ROto salesAE (%) %) 6.1 5.9 6.4 6.8 7.3 ROA (%) 4.5 4.1 4.2 4.3 4.6 ROCE (%) 5.7 5.4 5.8 5.9 6.2 Int. Cover (x) 5.5 4.7 4.0 4.1 4.2 Source: Company, AllianceDBS
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Company Guide Pavilion REIT
Quarterly / Interim Income Statement (RMm) FY Dec 2Q2017 3Q2017 4Q2017 1Q2018 2Q2018
Gross revenue 120 121 129 132 135 Property expenses (43.5) (43.2) (40.4) (42.5) (44.4) Net Property Income 76.7 78.2 89.1 89.0 90.6 Other Operating expenses (6.9) (6.9) (7.6) (7.3) (7.8) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (15.4) (15.9) (16.2) (16.4) (22.1)
Exceptional Gain/(Loss) 0.0 0.0 17.3 0.0 0.0 Net Income 54.4 55.4 82.6 65.4 60.8 Tax 0.0 0.0 0.0 0.0 0.0
Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax 54.4 55.4 82.6 65.4 60.8 Total Return 54.4 55.4 82.6 65.4 60.8
Non-tax deductible Items 4.25 4.25 (12.4) 4.40 1.16 Net Inc available for Dist. 58.7 59.7 70.2 69.7 62.0 Growth & Ratio Revenue Gth (%) 1 1 7 2 3 N Property Inc Gth (%) (3) 2 14 0 2 Net Inc Gth (%) (5) 2 49 (21) (7) Net Prop Inc Margin (%) 63.8 64.4 68.8 67.7 67.1 Dist. Payout Ratio (%) 100.0 0.0 99.9 0.0 100.0
Balance Sheet (RMm) FY Dec 2016A 2017A 2018F 2019F 2020F
Investment Properties 5,229 5,268 5,868 5,887 5,906 Other LT Assets 1.96 60.1 60.1 60.1 60.1 Cash & ST Invts 317 275 272 253 243 Inventory 1.32 1.55 1.55 1.55 1.55 Debtors 43.1 48.1 56.6 59.4 61.4 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 5,592 5,653 6,258 6,262 6,273
ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 194 177 208 219 226 Other Current Liab 0.0 0.0 0.0 0.0 0.0 LT Debt 1,412 1,463 2,043 2,043 2,053 Other LT Liabilities 65.4 73.1 73.1 73.1 73.1 Unit holders’ funds 3,921 3,940 3,934 3,927 3,921 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 5,592 5,653 6,258 6,262 6,273
Non-Cash Wkg. Capital (149) (127) (150) (158) (163) Net Cash/(Debt) (1,095) (1,187) (1,771) (1,789) (1,810) Ratio Current Ratio (x) 1.9 1.8 1.6 1.4 1.4 Quick Ratio (x) 1.9 1.8 1.6 1.4 1.3 Aggregate Leverage (%) 25.3 25.9 32.6 32.6 32.7 Z-Score (X) 2.0 2.0 1.5 1.5 1.5
Source: Company, AllianceDBS
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Company Guide
Pavilion REIT
Cash Flow Statement (RMm) FY Dec 2016A 2017A 2018F 2019F 2020F
Pre-Tax Income 235 232 253 268 287 Dep. & Amort. 0.66 0.50 0.50 0.50 0.50 Tax Paid 0.0 0.0 0.0 0.0 0.0
Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. 51.4 (22.0) 22.7 7.61 5.40
Other Operating CF 35.4 84.2 83.8 87.5 88.6 Net Operating CF 323 295 360 364 381 Net Invt in Properties (543) (22.5) (600) (20.0) (20.0) Other Invts (net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0 Other Investing CF (13.0) (51.7) 8.15 8.05 7.50 Net Investing CF (556) (74.3) (592) (12.0) (12.5) Distribution Paid (251) (243) (260) (275) (293) Chg in Gross Debt 767 47.2 580 0.0 10.0 New units issued 0.0 0.0 0.0 0.0 0.0 Other Financing CF (170) (67.6) (91.9) (95.5) (96.1) Net Financing CF 346 (264) 229 (371) (379) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 113 (43.0) (3.5) (18.4) (10.5)
Operating CFPS (sen) 8.98 10.5 11.1 11.7 12.3 Free CFPS (sen) (7.3) 8.99 (7.9) 11.3 11.9 Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS Analyst: Siti Ruzanna Mohd Faruk
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Company Guide Pavilion REIT
AllianceDBS recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends
Completed Date: 27 Jul 2018 08:04:35 (MYT) Dissemination Date: 27 Jul 2018 08:05:14 (MYT)
Sources for all charts and tables are AllianceDBS unless otherwise specified.
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Company Guide
Pavilion REIT
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Company Guide Pavilion REIT
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Pavilion REIT
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Company Guide Pavilion REIT
DBS Regional Research Offices
HONG KONG MALAYSIA SINGAPORE DBS Bank (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 68 Des Voeux Road Central Capital Square, Marina Bay Financial Centre Tower 3 Central, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 65 6878 8888 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 65 65353 418 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] Participant of the Stock Exchange of Hong Kong e-mail: [email protected] Company Regn. No. 196800306E
INDONESIA THAILAND PT DBS Vickers Sekuritas (Indonesia) DBS Vickers Securities (Thailand) Co Ltd Contact: Maynard Priajaya Arif Contact: Chanpen Sirithanarattanakul DBS Bank Tower 989 Siam Piwat Tower Building, Ciputra World 1, 32/F 9th, 14th-15th Floor Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan, Jakarta 12940, Indonesia Bangkok Thailand 10330 Tel: 62 21 3003 4900 Tel. 66 2 857 7831 Fax: 6221 3003 4943 Fax: 66 2 658 1269 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand
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