Results

• 1QFY16 revenue of RM106.69m was translated into normalised net profit of RM61.47m, accounting for 23.0% and 23.5% of HLIB and consensus’s forecasts, respectively.

Deviations

• We deem the result in-line with higher contribution expected in the subsequent quarters from the recently concluded properties acquisition (da:men and The Intermark).

Dividends

• None as dividend is usually declared semi-annually.

Highlight

• Rental income from retail for this quarter is rather flat (+1.2%) as a result of slower yoy same store sales growth given the high base effect of pre-GST loading last year while higher rental reversion will only contribute from 2H onwards.

• Occupancy rate for Pavilion Mall was consistently high at 98%. We understand that negotiations are still ongoing for the 69% of the tenancy (involving major anchor tenants) expiring 2H this year. Close to 10% of NLA had been renewed since early of the year at an average reversion of 5%-7%.

• Occupancy rate for Pavilion Tower was at 93%, while a total 48% of NLA tenancy would expire in 2016. A softer office market may limit upside for reversion, nevertheless, the office tower commands only about 3% to the gross revenue and is going to be immaterial with the addition income from newly acquired properties.

• In line with our view, management guided cautious operating envi ronment with challenges on upcoming rental reversion. No major asset enhancement initiatives planned for 2016 as there will be major repositioning of tenants upon expiry of lease in 4Q, which will result in loss of income for a month.

• With two recently concluded acquisitions worth some RM650m, PREIT’s portfoli o assets now stands at RM5.2bn and gearing remains healthy at 26% (vs industry: 30%).

Risks

• Limited portfolio diversification (in terms of market segment) and internal pipeline.
• Intensifying competition for retail space.
• Prolonged negative consumer sentiment.

Forecasts

• Revise downward revenue assumption for the newly acquired assets by circa 2%.

Rating

HOLD , TP: RM1.68 Positives:

• Largest direct exposure to the super-prime location.
• Strong branding and rental reversions.
• Well-managed tenant mix. Negatives:
• High competition for suburbs malls.

Valuation

• Maintain HOLD rating with unchanged TP of RM1.68.
• Targeted yield remains at 5.2% based on historical average yield spread of Pavilion REIT and 10-year MGS.

Source: Hong Leong Investment Bank Research - 29 Apr 2016