Results

• FY15 revenue of RM413.9m was translated into normalised net profit of RM240.7, accounting for 99.6% and 99.4% of HLIB and consensus FY forecasts, respectively.

Deviations

• Largely in-line

Dividends

• Second interim dividend of 4.14 sen was declared during fourth quarter, payable on 26 Feb 2016. FY15 dividend amounted to 8.23 sen per unit (5.3% yield) (FY14: 7.96 sen) accounting for 103% of our full year DPU assumptions.

Highlight

• For year 2015, average foot fall dropped to 28-29m from 33m previously while strong average store sales growth (+5-6%) was achieved despite post GST implementation, political events and slower tourist arrivals.

• Notably, occupancy rate for Pavilion Mall was consistent high at 98.5%, while 69% of the tenancy would expire this year. So far 11% of the 69% NLA has been renewed at an average reversion of 5%, with guided targeted reversion rate to be around 5-7% for the remaining.

• Occupancy rate for Pavilion Tower was 98%, while 48% of NLA tenancy would expire in 2016. To date, only one tenant from property sector has confi rmed not to renew and the management is actively looking for the replacement. Nevertheless, the mall commands 97% to the gross revenue and a temporary vacant in office segment will not have material impact on earnings.

• In line with our view, management guided cautious outlook with challenges on rental reversion. No asset enhancement initiatives planned for 2016 as they will focus on maintenance program, renewal and repositioning tenants.

• Upon completion of the two ongoing acquisitions (da:men and Intermark) by 1QFY16, P REIT’s portfolio assets will increase to RM5.3bn and gearing will balloon to 27% (industry: 32%) given both the acquisitions are funded by 100% debt.

• Other assets under pipeline include The Extension (10 floors of retail and F&B) and Fahrenheit88, which are expected to be injected to REIT in 4QFY16 and 1HFY17, respectively.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD , TP: RM1.60

Positives:

• Largest direct exposure to the super-prime location.
• 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 and series of price hikes.

Valuation

• Maintain HOLD with unchanged TP of RM1.60.
• Targeted yield remains at 5.4% based on historical average yield spread of Pavilion REIT and 10-year MGS.

Source: Hong Leong Investment Bank Research - 15 Jan 2016