Results

• 6MFY16 revenue of RM224.69m was translated into normalised net profit of RM121.03m, accounting for 47.4% and 46.1% of HLIB and consensus forecasts.

Deviations

• We deem the results slightly below despite expectation of higher contribution from the newly properties in coming quarters due the lower than expected incremental income from new properties and higher financing costs involved.

Dividends

• DPU of 4.16 sen (1HFY15: 4.14 sen) is declared and going ex on 9th Aug 2016, representing an annualized yield of 4.62% at current price.

Highlight

• Both rental income and NPI for Q2 improved by 14.4% & 13.25% yoy on after incorporating rental income from the two newly acquired properties in Damen and Intermark while the rental income for Pavilion Mall (PM) remained stable.

• We understand that negotiations are still ongoing for the 69% of the tenancy expiring in 2H at PM with Circa 50% of NLA had been renewed at an average reversion of 5%-7%.

• Same store sales improved by 10% yoy in Q2 given the low base effect of post-GST last year and improved consumer spending, in line with our expectation of improved local consumption.

• Major repositioning of tenants will be undertaken in 4Q with some tenants moving to the Pavilion Extension (200k+ sq ft), which is expected to be ready in 4Q (injection likely in FY17). There could be some partial loss of income during the renovation and refurbishment period.

• On the two new properties, it will take time to mature with management’s strategy to reposition the mall and introduce the correct tenant mix in order to attract the targeted foot fall and grow the assets. Parkson will be introduced as an anchor tenant as part of the strategy to improve Damen.

Risks

• Highly sensitive to downturn in consumer spending.

• Intensifying competition on retail space.

Forecasts

• We lower our revenue growth assumption and impute higher financing costs into our models, FY16 & 17 bottom line is reduced by 2.3% and 1.3%, respectively.

Rating

BUY, TP: RM1.95

• We continue to like PREIT with projected high income growth in FY17 post acquisitions and major reversion as well as visible pipeline of assets injections.

• Positives: High quality assets at super-prime location and strong branding;  Visible pipeline of injections.
• Negatives: High competition for suburbs malls.

Valuation

• Maintain BUY rating with lower TP of RM1.95 after incorporating the changes post results review.

• Targeted yield remains at 4.9% based on historical average yield spread of Pavilion REIT and 10-year MGS

Source: Hong Leong Investment Bank Research - 29 Jul 2016