Pavilion Reit - Exceptional FY13F, with upcoming Fashion Avenue and tenancy renewal BUY

Stock Name: PAVREIT
Company Name: PAVILION REAL ESTATE INV TRUST

Research House: AMMB

Price Call: BUY

Target Price: 1.33

- We upgrade our rating on Pavilion REIT (PavREIT) from aHOLD 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 earningsestimates for FY12F and FY13F by 1% and 2%, respectively, translating into amarginally higher DPU of 6.2 sen and 7.3 sen, underpinned by organic growth andacquisition. We assume a 99% payout ratio. 

- The Fashion Avenue (NLA: 68,000sf) is targeted to beopened by early September 2012. So far, there is a circa 90%  of precommitted tenants. The full impact ofthe Fashion Avenue and an estimated average rental rate of RM16psf, comparedwith under-RM10psf previously, would be seen in FY13F.

- Additionally, at least 67% of tenants are due for renewalin FY13F. We expect a 12%-15% rental reversion because tenants are committed toa 3-year tenancy during the infant stage of the mall. In our model, we forecasta higher weighted average rental rate of RM19psf for FY13F, vs. RM17psf forFY12F. 

- In order for Pavilion Mall to sustain its attractiveness,circa 5% of the tenants are changed on a yearly basis to provide a fresher appealand a newer look to the mall. Tenants are also required to refurbish theirspace every 6 years.

- Elsewhere, management expects Farenheit 88 to stabiliseits tenancy within 3 years by FY13F. PavREIT would acquire the mall if theowner decides to sell. As such, this may be PavREIT's first asset injectionthat could take place by FY14, given that the mall is deemed fit.

- Pavilion extension (NLA:250,000sf, GFA:4,000sf), whichconsists of up to 8 levels,  will beadjoining the existing mall at levels 1, 2 and 3. Additionally, the mall'sappeal would be enhanced by a proposed glass-covered structure running from LaBodega towards the fountain. The extension is currently in the soil testingstage. Construction is to begin in 3QFY12. Management intends to acquire theextension immediately upon completion in FY16. 

- As Pavilion mall took a year to stabilise the tenancy, theextension is expected to take 6 months, given the maturity of the mall.Management expects full tenancy for the extension, underpinned by a longwaiting 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 shiftingour valuation basis to FY13F. Given this, PavREIT is attractive and we expectmore news flow to excite the market. At current level, PavREIT has a dividendyield 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