Results

• 1QFY15 gross revenue of RM105.1m was translated into normalised net profit of RM60.5m, accounting for 25.0% and 25.1% of HLIB and consensus FY forecasts, respectively.

Deviations

• Largely in-line.

Dividends

• None (1Q14 : None).

• Dividends normally declared semi annually – during second and fourth quarter.

Highlights

• 1Q15 revenue grew by 4.0% yoy after completion of asset enhancement works in 2014, coupled with higher service charge starting from May 2014.

• Occupancy rates for mall and office were largely intact sequentially during the current quarter (Figure #6). We are not overly concerned about the vacant space left by the previous anchor tenant in Pavilion Tower because office segment only contributes circa 3% of total revenue for PREIT (Figure #7).

• We understand that capex for FY15 will be approximately RM34m, mainly for: (i) renovate balance of toilets in the mall; (ii) renovate part of floor space at Level 1, around the Gourmet Emporium area; and (iii) upgrade air condition system in the mall to ensure more efficiency in power consumption and distribution of airflow.

• Tenant sales for 1Q15 has been stable, however, management shared that it is very slow in April as consumers tighten their belt. We think that this will only be temporary as consumers will adjust their spending habit after a while.

• Tenancies expiration in FY15 for the mall and office is 15% and 22% respectively (Figure #4). Management views that there is no sign of non-renewal for the office segment while for the mall, there will be slight relocation and also revision of tenant mix to be carried out. One of the Top 10 tenants, Couch (M) Sdn Bhd’s tenancy is due in 3Q15.

Risks

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

Forecasts

• 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 GST implementation.

Valuation

Maintain HOLD recommendation on the equity and unchanged TP of RM1.47.

• Targeted yield remains at 5.7%, derived from historical average yield spread of Pavilion REIT and 7-year MGS.

Source: Hong Leong Investment Bank Research - 24 Apr 2015