Results

2Q14 core PAT rose 7.1% yoy to RM55.6m, with YTD net profit of RM112.3m, making up 52% and 50% of HLIB and consensus estimates respectively.

Deviations

None

DPU

1.9 sen DPU was declared in 2Q14, bringing YTD DPU to 3.84 sen, or 54% of our 7.12 sen full-year DPU forecast.

Highlights

Weak 2Q. Apart from seasonal weakness in 2Q, management also concedes that visitor footfalls were also affected by the MH370 incident, given that its mall is heavily reliant on tourist spending.

Limited scope for rental reversions, given that only 3% of the mall’s NLA is up for renewal in FY14 (Figure #3).

Update on DBKL assessment rates. PREIT had previously made provisions for 140% increase in the assessment rate but after an appeal, is now informed that the rate hike is likely to be just 25%. PREIT expects to fully pass this on to tenants via higher service charge. This comes as good news in addition to its ability to fully pass on the 14.89% power tariff hike to its tenants as well.

Not impacted by OPR rate hike. More good news as 99% of its existing debt is fixed rate in nature. We understand the average tenor of its borrowings is approximately 2 years.

Reconfiguring Pavilion Mall. PREIT has rejigged Level 7 into new F&B space, as well as Level 2 of its car park, to create 11k sft of new NLA, effective from Nov 2014.

Pavilion extension update. The extension ROFR remains on track to be completed by end 2015 and ready for injection into the REIT by 2016. The 22m underground tunnel connecting the extension wing to Farenheit 88 will be completed by Aug 2014.

USJ ROFR update. The USJ mall is in construction and remains on-track for completion by late 2015, and ready for injection around the same time as Pavilion extension ROFR.

Fahrenheit 88 ROR update. The F88 acquisition was originally planned for 3Q 2013, but has been pushed back to end-2014.

Risks

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

Forecasts

We fine-tune our FY15-16 net profit forecast by +1.8% to factor in the healthy rental reversions and slight increase in the mall’s NLA.

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 25bps rise in OPR, we maintain our target yield at 6.0%, and keep our TP unchanged at RM1.26. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 18 Jul 2014