- We reaffirm our HOLD recommendation on Pavilion REIT (PREIT), with an unchanged fair value of RM1.65/unit, based on our DCF-derived valuation, post-2QFY13 result release.

- 1HFY13 net profit was in-line with expectations. Net profit was registered at RM52mil for 2QFY13, bringing the 1HFY13 total to RM106mil (+11% YoY), accounting for 50% of our, and 50% of consensus.

- A DPU of 1.8 sen was declared for 2QFY13. This brings 1HFY13 DPU to 3.7 sen, in tandem with our full-year target of 7.1 sen.

- Total revenue grew by 11% YoY, but was down 4% QoQ. YoY growth was boosted by the Fashion Avenue’s contribution. On the other hand, the QoQ dip was due to the seasonality effect arising from the festive season in 4Q and 1Q. This was further dampened by the general election overhang.

- Nevertheless, business in the 2HFY13F is expected to pick up post the general election and bolstered by festive seasons.

- Our projections are maintained as we expect earnings to grow steadily into 2HFY13F. This is further supported by the higher rental reversion achieved from 60% of NLA expiring in September and to translate into earnings growth for FY14F. About 50% of leases had been renewed and confirmed. Out of the remaining 50%, 30% are either in negotiation stage or the letter offers had been sent out.

- Operationally, the occupancy rate stood at 99.5% and 94% respectively for Pavilion Mall and Pavilion Tower. Meanwhile, the average rental is at the RM19psf and RM5psf range for Pavilion Mall and Pavilion Tower, respectively. Some maintenance works such as toilet upgrading and enhancement of the common corridor were done during the quarter.

- Timeline for Fahrenheit 88’s injection is deferred for at least a year. The earliest the mall could be injected appears to be in FY15F, after the stabilisation of rental yield following the recent asset enhancement initiatives (AEI) at Level 3 and an upcoming AEI on Level 2 in 3Q.

- Rising concerns over the bond yields are causing the REITs to be less attractive. At the current price, the stock offers dividend yields of 4.9%. On the flipside, 99.5% of the group’s loans are on fixed with an average interest rate within the 4.2%-4.8% range.

- Nonetheless, our only BUY within the REIT theme is CMMT (FV: RM2.15/unit) as we believe in CMMT is likely to inject an asset first compared to PREIT.  

Source: AmeSecurities