Results

• 6MFY15 gross revenue of RM208.0m was translated into normalised net profit of RM119.8, accounting for 49.5% and 49.6% of HLIB and consensus FY forecasts, respectively.

Deviations

• Largely in-line.

Dividends

• Declared first interim dividend of 4.09 sen (1H14: 3.84 sen) of which 3.99 sen is taxable while 0.10 sen is non-taxable.

• This represents 51.3% of our full year DPU forecast.

Highlights

• Total revenue for 1H grew by 4.2% emanate mainly from higher rental income (+5.4%) and partially offset by decline in other revenue (-2.3%).

• Total operating expenses for 1H inched up by 1% yoy due to floor upgrading exercise at Level 1 around Gourmet Emporium area, mitigated by lower utilities and quit rent.

• Occupancy rate at Pavilion Tower has improved sequential ly from 81% to 87% (Figure #7) as vacant space left by Aker Engineering has already been taken up. Management shared that few tenants are in the midst of finalizing their agreements to take up the remaining space at office tower. As such, occupancy rate for office is expected to improve further by year-end. On the other hand, occupancy rate at the mall remain unperturbed.

• Management also shared that so far more than 90% of tenants due in 2015 has renewed thei r tenancies with positive rental reversion recorded in most cases.

• While there is no clear timeline on injection of Pavilion Extension, management guided that part of asset enhancement initiatives will be creation of new ent rance at Jalan Bukit Bintang which will be completed within this year.

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 - 31 Jul 2015