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

- PREIT’s 3QFY14 realised net profit of RM63mil brought its 9MFY14 realised net profit to RM175mil. It is in line with expectations, accounting for 78% and 77% of our and consensus earnings forecasts, respectively.

- Net property income (NPI) and realised net profit grew by 8.6% to RM212mil and 10.1% YoY to RM175mil, respectively, underpinned by higher rental reversion.

- For 3QFY14, PREIT’s overall property operating expenses were lower by 8% YoY at RM26mil. This was due to the reversal of overprovision of assessment charges recorded in the 1HFY14 and recognition of credit/overcharge of electricity charges by Tenaga Nasional Bhd. NPI grew by 16% YoY as it was offset by the incurrence of maintenance work for a few advertising sites.

- During the year, PREIT incurred RM18mil in capital expenditure. These are mainly for asset enhancement initiatives (AEI) along the corridors, relocation of the beauty precinct to the Beauty Hall, creation of additional retail space on Level 1 & 2, conversion of the previous beauty precinct located at Connection into an F&B area, toilet upgrading works, and car park guidance system.

- PREIT is expected to benefit from rental increases with the additional retail space created at the new service shops at Level 1 and the new F&B area, that are expected completion in November.

- Its balance sheet remained solid with a gearing of 16.4%. We make no changes to our FY14F-FY16F earnings. Our HOLD call is premised on the lack of an immediate-term asset acquisition. Nonetheless, we believe that PREIT is likely to acquire Pavilion Extension upon its completion in mid-2016.

- The stock is trading with a distribution yield of 5.1%, and at a spread of 125bps over the 10-year MGS’ yield.

Source: AmeSecurities