Analysts raise earnings forecast after PavReit adds two hotels to portfolio

• After acquiring two premier hotels namely Banyan Tree Hotel and Pavilion Hotel in Kuala Lumpur for a sum of RM480 million.

KUALA LUMPUR (Dec 6): Analysts have raised the earnings forecast for Pavilion Real Estate Investment Trust (KL:PAVREIT) after acquiring two premier hotels namely Banyan Tree Hotel and Pavilion Hotel in Kuala Lumpur for a sum of RM480 million.

"The group plans to fund the acquisition through the issuance of new shares.

"While the assets are expected to generate 7% yield, the potential earnings accretion may be tempered by share dilution from the placement," said Kenanga Research in a note on Friday.

Based on the group's plan to issue new shares up to a maximum of RM552 million, and an illustrative price of RM1.43 for new issues, Kenanga anticipates 386 million new units to be issued for the acquisition.

The research house raised its FY25 earnings by 5%, fine-tuned target price (TP) to RM1.63 from RM1.66 after the effects from share dilution, and maintained an 'outperform' call.

Kenanga noted that in the lease agreement, the operator will lease the two properties for a term of 10 years at a combined fixed rental of RM33.5 million with 5% step-up after 5 years which translates into an initial gross asset yield of 7%.

"We raised our FY25F earnings by 5% on the hotels’ income contribution from 2HFY25, assuming the deal is successfully completed as intended."

The firm said its TP is based on adjusted FY25 net dividend per unit (NDPU) of 9.4 sen.

This, it said, is against an unchanged target yield of 5.75% (derived from a 2% yield spread above its 10-year MGS assumption of 3.75%).

"The low yield spread is to reflect its prime asset portfolio as anchored by Pavilion KL and Elite Pavilion Mall."

Separately, Maybank Investment Bank raised its FY25/26 core net profit forecasts by 4%/8% respectively, and lifted its DDM-TP to RM1.72 (up 4 sen) following the addition of the two hotels in the Reit's portfolio.

"We are positive on the deal, as it offers EPU (earnings per unit) and DPU accretion of 0.7%/4.6% in FY25/26E respectively, assuming 100% new placement units to fund the acquisitions," it added.

PavREIT is acquiring BTKL from Lumayan Indah Sdn Bhd (LISB) for a consideration of RM140 million. The five (5)-star hotel operated and managed by Banyan Tree Hotels & Resorts Pte Ltd. comprises 55 well-appointed rooms. Its average occupancy up to Sep 2024 stood at 83%.

PavREIT is also acquiring PHKL from Harmoni Perkasa Sdn Bhd (HPSB) for a consideration of RM340 million. The five (5)-star hotel operated and managed by Banyan Tree Hotels & Resorts which comprises 325 well-appointed rooms in a 13-storey hotel block erected on Pavilion Kuala Lumpur shopping mall (Pavilion KL). Its average occupancy up to Sept 2024 stood at 82%.

Subject to approvals, both the proposed acquisitions and proposed placement are targeted to be completed by 1HFY25.

At 11.30am, PavReit shares gained 2 sen or 1.3% to RM1.49, translating into a market capitalisation of RM2.06 billion.

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