Results

• 9MFY15 gross revenue of RM301.5m was translated into normalised net profit of RM180.3m, accounting for 74.6% and 73.9% of HLIB and consensus FY forecasts, respectively.

Deviations

• Largely in-line.

Dividends

• None. Normally declared in 2nd and 4th quarter.

Highlights

• 9M15 revenue grew by 3.0% yoy on the back of positive contribution by both segment – mall +3.1% yoy and office +1.7% yoy; partially offset by decline in other revenue of - 4.8% yoy. We understand that other revenue dropped was due to lower advertising revenue arising from tight budget.

• Cumulatively, operating expense also increased due to higher maintenance expense (floor upgrading exercise at Level 1) and recognition of credit to electricity charges given by TNB last year on one of the electricity metering system.

• Occupancy rate for both properties experienced marginal decline but still at manageable level (Figure #7).

• Management also shared that approximately RM10.3m will be allocated this year for creation of new drop off entrance at Jalan Bukit Bintang as well as continuous toilets upgrading works and enhancement to its common corridor.

• Outlook on retail remain challenging largely due to weakening ringgit which results in higher import cost.

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 - 30 Oct 2015