Results

• FY14 revenue of RM402.1m was translated into normalised net profit of RM232.4, accounting for 101.4% and 101.2% of HLIB and consensus forecasts, respectively.

Deviations

• Broadly in-line

Dividends

• As expected, second interim dividend of 4.12 sen was declared during fourth quarter with ex -date on 27 th Jan 2015.

• YTD dividend amounted to 7.96 sen per unit (FY13: 7.36 sen) accounting for 105% of our full year DPU assumptions.

Highlights

• Major refurbishment has been completed as the new luxurious Beauty Hall has been relocated and two out of seven new restaurants at Dining Loft Precinc t has begun operation (#Figure 7 ). We are of the view that continuous asset enhancement initiatives will be a boon for Pavilion REIT to weather the current challenging outlook in retail sector and also enable us to maintain our rental assumptions (RM22.30 per sq ft) for 2015.

• In view of excess supply of office space, occupancy rate for Pavilion Tower remain stuck at 81% and the trust is still struggling to find replacement for vacant office space left by Aker Engineering since 2Q14. We opine that it is difficult, if not impossible; to get tenant to take up the space given t hat it’s location in super- prime area but not a Grade A office building.

• In a more positive note, occupancy rate for Pavilion Mall has improved to 98% (previously 96.2%) and we expect it to reach 100% when all restaurants in Dining Loft have been opened. In essence, the mall contributes 97% to gross revenue and some vacancy in office segment will not have material impact on earnings.

• There is no clear indication when Fahrenheit88 will be injected into the REIT while completion of The Extension (10 floors of retail and F&B) in mid-2 016 should act as enticement to the counter.

Risks

• Limited portfolio diversification (in terms of market segment) and internal pipeline
• Intensifying competition
• Exposure to rising inflation.

Forecasts

• Largely unchanged.

Rating

HOLD , TP: RM1.47

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.

Negatives

• consumer sentiment as a result of GSTimplementation.

Valuation

• Maintain HOLD with a higher TP of RM1.47 (previously RM1.44) as we roll forward our valuation to FY15.
• 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 - 16 Jan 2015