Results

9MFY14  core  net profit of RM175.29m (+10.13% yoy) came in  within  ex pectations,  accounting  for  75.4%  and  77.0%  of HLIB and consensus full year estimates, respectively.

Dividends

Dividend  of  2.16  sen  was  declared  during  the  quarter, bringing the  accumulated dividend year to date to 6.00  sen, accounting  for  78.0%  and  77.9%  HLIB  and  cons ensus  full year  DPU  projections, respectively.

Highlights 

Higher  rental income  recorded during the quarter  (+11.92% yoy)  due  to  major  tenants  renewed  their  tenancies  from 3Q13.

Total gross revenue  in 3Q14  increased  + 8.83%  yoy  on the back of increase in retail segment (+9.7 0% yoy) but was offset  by  decrease  in  office  segment  by  -17.20%  yoy.  We understand  that  the  decrease  was  due  to  anchor  tenant (Aker  Engineering  Sdn  Bhd)  giv ing  up  its  space  in  2Q14. Aker  Engineering  Sdn  Bhd  previously  occupied  6  floors  of the office  tower or  35% of net lettable area.

Lower  total  operating expenses  during  the  quarter  ( -8.24% yoy)  mainly  due  to:  (1)  lower  utilities  expenses  (- 19.00% yoy)  arising  from  rec ognition  of  credit  /  overcharge  of electricity charges  on  one  of the electricity metering system by  TNB;  and  (2)  lower  quit  rent  and  assessment  (- 91.01% yoy)  as  a  result  of  reversal  of  provision  on  the  expenses during  1H14.

Throughout  the  year,  the  management  company  has incurred  RM17.7m  capex  mainly  for  car  park  guidance system,  toilet  upgrading  works,  enhancement  works  at common  corridor  and  relocation  of  beauty  precinct  to  the Beauty  Hall.  We  believe  the  asset  enhancement  initiatives carried out by the management  company will result in higher rental reversion.

Risks

Limited portfolio diversific ation (in terms of market segment) and  internal  pipeline;  intensifying  competition;  exposure  to rising inflation.

Forecasts

• Unchanged.

Rating

Positives :

• Enjoys the largest direct exposure to the super- prime Bukit Bintang stretch via Pavilion  Mall.
• Strong  branding  and rental reversions .
• Well-managed  tenant mix.

Negatives :

• Over-supply  of office  space in Klang Valley.
• Negative  consumer  sentiment  as  a  result  of  subsidies rationalization  initiatives  and GST implementation.

Valuations 

• We maintain  TP of  RM1.44  and  HOLD  recommendation  on the stock.
• Targeted  yield remains  at  5.7% based on historical average yield spread  of Pavilion  REIT   and 7-year MGS.

Source: Hong Leong Investment Bank Research - 31 Oct 2014