-  We reaffirm our HOLD recommendation on Pavilion REIT (PREIT), with a lower fair value of RM1.55/unit (vs. RM1.65/unit previously), based on our DCF valuation, as we have adjusted our WACC to account for the higher bond yields environment.

-  PREIT’s 9MFY13 realised net profit of RM159mil (+10% YoY, +2% QoQ) were within our expectations, constituting 75% of our full-year FY13 projections of RM214mil and 70% of consensus estimates.

-  The overall decent 9MFY13 results was buoyed by higher rentals achieved from Fashion Avenue (business started in September 2012) and Pavilion Tower (100% occupancy) as well as higher advertising income.

-  Despite higher property expenses from major replacement and preventive maintenance works (which started in 4QFY12), net property income continued to improve by 8% YoY.

-  3Q’s operating expense was sequentially higher due to a corresponding cost to higher advertising income and marketing cost for the Hari Raya and Mega Sales events.

-  We understand that most lease renewals for FY13 have been renewed.

-  All in all, we expect the retail business to pick up in the 4Q underpinned by higher spending during the festive seasons.

-  Based on our channel checks with some retailers in Pavilion Mall, we understand that Level 7 (currently housing the wellness and slimming centres) is potentially earmarked for tenant remixing. Should this materialises, we think that Level 7 would be turned into an F&B floor, similar to Level 6.

-  Our FY13F-FY15F EPU estimates are kept unchanged. The stock is trading at distribution yields of 5.2% and 5.7% for FY13F and FY14F, respectively.

-  While the injection of Fahrenheit 88 is only expected to take off in FY15F following stabilisation of rental yield, we see a lack of near-term acquisitive growth for PREIT. Hence, our HOLD call.

-  We prefer Capitamalls Trust Malaysia (BUY, FV: RM2.15/unit) as it is supported by Queensbay Mall, which is a ready and yield-accretive asset.

Source: AmeSecurities