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

- PREIT recorded 2QFY15 core earnings of RM59mil, bringing 1HFY15 core earnings to RM120mil (+7 YoY and -2% QoQ), and 2QFY15 DPU of 2.03sen (bringing 1HFY15 DPU to 3.6sen) vs. 1.9sen in 2QFY14.

- Results met expectations, comprising 49% of our full-year estimate of RM251mil and 50% of consensus.

- Net property income rose by 6% YoY thanks to the positive rental reversion and additional rental arising from 2014’s asset enhancement initiatives (AEIs), i.e. Beauty Precinct, extension of Couture Pavilion at Level 2 and Dining Loft at Level 7.

- Occupancy rates were healthy at 98.5% for Pavilion Mall and 87% for Pavilion Tower as at end-June 2015. Management is in the midst of securing a new tenant by the end of this year for its office tower, which will see occupancy rate rise to 98%.

- All in, our EPU estimate remains unchanged. PREIT is expected to continue growing organically, underpinned by healthy rental reversion.

- For this year, the planned and on-going AEIs are toilet upgrading works, enhancement to common corridors, and the creation of a new drop-off entrance at Jalan Bukit Bintang.

- We will turn more constructive on the stock when there are signs of sustained acquisition plans taking place. We expect increased newsflow momentum in the coming months as da:men mall is due for completion by 3QFY15. More significantly, the Pavilion Extension is also earmarked for completion by 4QFY16.

- Valuation is fair at the current levels. The stock is currently trading at a distribution yield of 5.4% and at a yield spread of 143bps against the 10-year Malaysia Government Bond’s 4.0%.

Source: AmeSecurities Research - 31 Jul 2015