- We reaffirm our HOLD rating on Pavilion REIT (PREIT) with an unchanged fair value of RM1.40/unit, based on our DCF valuation.

- PREIT announced 1QFY14 distributable income of RM57mil and DPU of 1.9sen, which are within expectations and accounted for 25% of our and consensus estimates.

- The stronger revenue performance was mainly attributed to rental reversions following 67% of NLA being renewed from 3QFY13 onwards.

- That said, net property income margin shrank to 68% from 70% in FY13, in tandem with higher utilities, renewable energy surcharge and assessment fees; operating cost surged by 14% YoY and 13% QoQ.

- Meanwhile, tenancy expiry for FY14F is low at 17%.

- Gearing remained below the 50% benchmark, at 16% as at end-1QFY14.

- Current ongoing asset enhancement initiatives (AEI) include the relocation of Seventh Heaven to the Centre Court on Level 7, conversion of the beauty precinct into an F&B area, and extension and reconfiguration of Level 2’s frontage facing Jalan Raja Chulan (formerly occupied by Jaguar and Maybank).

- Pavilion Mall will see the emergence of international brands such as Tony Burch, MCM, Davidoff, and others, following the completion of the AEIs in May.

- PREIT’s earnings growth is expected to be organic from FY14F to FY16F. Rentals will be further enhanced by the completion of the above-mentioned AEIs.

- Our HOLD rating is maintained as we await more meaningful catalysts, such as the acquisitions of Fahrenheit 88 and da:men mall, and extension of Pavilion to come through.

- Rising bond yields and narrowing of yield spread is seen as upside risk, in our view. PREIT is currently trading with a distribution of 5.4%, and a yield spread of less than 200bps. 

Source: AmeSecurities