Results

4Q13 core PAT rose 9.2% yoy to RM55m, with FY13 net profit of RM214.1m making up 104% and 91% of HLIB (in line) and consensus (below) estimates respectively.

Deviations

None

DPU

1.89 sen DPU was declared in 4Q13, bringing FY13 DPU to 7.36 sen, or 107% of our 6.88 sen full-year DPU forecast.

Highlights

Seasonally strong 4Q. 4Q was typically a strong quarter for Pavilion REIT with gross revenue rising 3.5% qoq and 5.0% yoy.

Rental reversions remain healthy. FY13 gross revenue rose 8.4% yoy on back of strong retail rental reversion of 16% for 65% of overall NLA in 2013.

Facing cost pressures in 2014. We believe NPI margin could come under some pressure this year, due to the hike in DBKL assessment rates (which has not been raised over the past 21 years) and the increase in service charge (currently RM4 psf). We gather that management is not confident of a full 100% pass through to tenants. Fortunately, the 14.89% electricity tariff hike can be passed on directly to tenants.

Pavilion extension update. Recall that previously, the extension ROFR (right of first refusal) was delayed by construction works. The extension ROFR remains on track to be completed by end 2015 and ready for injection into the REIT by mid-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 Pavilion extension ROFR.

Fahrenheit 88 ROR update. The F88 acquisition was originally planned for 3Q 2013, but has been pushed back by a year as the Sponsor is carrying out extensive space and tenant reconfiguration for levels 2 & 3. PREIT has already started excavating a 22m tunnel linking F88 to the extension ROFR.

Risks

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

Forecasts

Rolling over our numbers, we increase our net profit forecast by 0.5-1.3%.

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 rise in MGS yield, we raise our target yield for Pavilion REIT from 4.8% to 6.0%, and trim our TP from RM1.43 to RM1.26. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 20 Jan 2014