3 days ago
Kenanga Assigns 10% Fair Value Upside For Paradigm REIT
PARADIGM REIT, made its debut on the Main Market today with an Initial Public Offering (IPO) price of RM1.00 per share, the share opened flat at RM1 despite the much anticipated build up.
However, Kenanga Research, having conducted ground checks on its assets, has assigned a fair value of RM1.10 per share, based on a dividend yield spread of 2.75%.
PARADIGM's initial portfolio comprises three neighbourhood malls: Paradigm JB in Johor Bahru, Paradigm PJ in Petaling Jaya, and Bukit Tinggi Shopping Centre (BTSC) in Klang. While Paradigm PJ faces a saturated market, the REIT's significant income drivers are expected to come from Paradigm JB and potential upside from BTSC.
Portfolio Highlights: Paradigm JB – High Growth Driver (49% of FY24 Net Property Income – NPI) Located beside the Skudai Highway in Johor Bahru, this sizeable mall boasts 1.3 million sq ft of Net Lettable Area (NLA) and a 99% occupancy rate. It is significantly supported by Singaporean shoppers, who account for approximately one-third of its foot traffic and higher spending power, primarily on weekends. Anchors include Parkson, Harvey Norman, and Village Grocer, complemented by entertainment offerings like ice skating and bouldering that differentiate it from larger regional malls. Two key catalysts are expected to drive growth for Paradigm JB: Major Tenancy Renewal in CY26: Covering approximately 50% of its total space, this renewal is anticipated to deliver mid-teens rental reversion, benefiting from a low base set during the pandemic and strong market growth.
RTS Link (expected by end-CY2026): The completion of the Rapid Transit System (RTS) Link is projected to further boost the inflow of Singaporean shoppers, enhancing footfall and sales. Bukit Tinggi Shopping Centre (BTSC) – Strong Earnings Resilience (27% of FY24 NPI) This 1 million sq ft Gross Lettable Area (GLA) asset is fully master-leased to AEON Group and serves as one of AEON's best-performing malls in the Klang Valley, catering to everyday needs with a diverse tenant mix. Kenanga's site visit observed robust footfall, particularly on Sundays, with strong activity across all floors and a predominant mix of local Malay and Chinese shoppers. Upon lease expiry in CY29, the REIT holds the right to raise rent by up to 12%. The upcoming LRT3 station adjacent to the mall, expected to be completed in CY25, will further improve accessibility. AEON Group has also requested additional space from the management, presenting a potential income upside, though additional rental profits would be shared with the Sponsor, who will undertake the construction. Paradigm PJ – Moderate Risk A neighbourhood mall with 680,000 sq ft of NLA and 98% occupancy, located next to the LDP highway. It features mid-tier brands and entertainment tenants, anchored by Lotus's, GSC, and Harvey Norman. While well-maintained, the Petaling Jaya retail market is saturated with intense competition from rival malls like Damen Mall, 3 Damansara, and Subang Parade. Kenanga observed low weekday footfall and moderate weekend activity, leading to a moderate income risk assessment for this asset due to its lower income resilience relative to its size in a highly competitive landscape.
Future Prospects and Valuation: The REIT's sponsor, WCT Holdings Berhad (WCTH), has a pipeline of future assets for potential injection, including Hyatt Place Johor Bahru, Le Méridien Petaling Jaya, Première Hotel in Klang, and Gateway@klia2 at KLIA. Kenanga Research emphasizes the need for PARADIGM to exercise strong vigilance in asset quality screening, valuation assessment, and funding strategy to ensure any future acquisition results in net Distribution Per Unit (DPU) accretion. The group's current gearing stands at a healthy 34%.
Kenanga Research projects PARADIGM's earnings to increase by 9% in FY26, driven by the anticipated rental growth from Paradigm JB and the potential from BTSC. Based on a 6.5% target yield derived from a 2.75% yield spread above their 10-year Malaysian Government Securities (MGS) assumption of 3.75%, they derive a fair value of RM1.10 per share against an FY26F after-tax dividend of 7.1 sen.
In comparison to peers, Kenanga's target yield for PARADIGM reflects a slight premium against Capitaland Malaysia Trust (CLMT) (OP; TP: RM0.75; 6.75% target yield) due to more optimistic organic growth prospects. It also represents a slight discount against Pavilion REIT (PAVREIT) (6.3% target yield on FY26F after-tax dividend) to reflect PARADIGM's smaller asset sizes and lower profitability. The research house reiterated that it does not assign a valuation premium solely based on the existence of a Rights of First Refusal (ROFR) unless future acquisitions are demonstrably beneficial to minority unitholders.
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