Results

2Q13 core PAT rose 8.8% yoy to RM52m, and YTD earnings made up 51% and 48% of HLIB and consensus estimates respectively.

Deviations

None

DPU

1.79 sen DPU was declared in 2Q13, bringing YTD DPU to 3.65 sen, or 53% of our 6.88 sen full-year DPU forecast.

Highlights

Seasonal 2Q weakness. 2Q is typically a slow quarter for Pavilion REIT and this was no exception, as gross revenue declined 3.8% qoq. Nonetheless, we note that excluding seasonal weakness, gross revenue in fact rose 10.0% yoy.

Rental reversions remain healthy. Gross revenue rose 10.0% yoy on back of strong retail rental from Fashion Avenue, which commenced operations in 3Q 2012, and Pavilion Office Tower being fully tenanted from 3Q 2012. Recall that 2013 represents a key year for Pavilion REIT, with 67% of NLA due for renewal, with approximately half of this amount already renewed YTD.

Pavilion extension update. For the extension ROFR (right of first refusal), we understand there could be some construction delays due to challenges at the work site, which suggests that asset injection can only take place in early 2016 at the soonest.

USJ ROFR update. The USJ mall is in construction and remains on-track for completion by late 2015, and could be ready for injection before the extension ROFR.

Fahrenheit 88 ROR update. The F88 acquisition was originally planned for 3Q 2013, with the key to sealing the deal being an expected round of major rental reversions in 2H 2013. However, the injection now looks set to be pushed back by a year as the Sponsor is carrying out extensive space and tenant reconfiguration for levels 2 & 3.

Risks

Slowdown in the economy and consumer spending; delay in the MRT project execution (Bukit Bintang Station).

Forecasts

Maintained.

Rating

HOLD

Positives: Enjoys the largest direct exposure to the superprime Bukit Bintang stretch via Pavilion Mall; strong branding and rental reversions; well-managed tenant mix.

Negatives: Limited internal pipeline vs. Sunway REIT and CMMT; intensifying competition for third party retail assets; upside capped by premium valuations; limited free float.

Valuation

Given the subdued sentiment in the property sector and narrowing spread, we raise our target yield for Pavilion REIT from 4.5% to 4.8%. We trim our TP from RM1.53 to RM1.43. Maintain HOLD.

Source:Hong Leong Investment Bank Research - 2 Aug 2013