Results

• 9MFY16 revenue of RM342.24m was translated into normalised net profit of RM180.41m, accounting for 72.3% and 70.1% of HLIB and consensus forecasts.

Deviations

• We deem the results slightly below expectations due the lower than expected incremental income from new properties involved.

Dividends

• None as it is usually declared on semi-annual basis.

Highlight

• Yoy, both gross revenue and NPI improved by 14.7% & 11.0% respectively with growth mainly coming from the two newly acquired properties in Damen and Intermark. However, net profit was down 1.8% due to high opex and borrowing cost associated with the newly acquired properties; while both malls still need some time to perform to its potential as previously guided.

• Qoq, revenue (-0.4%) and net profit (-0.3%) were marginally lower partially affected by repositioning of tenants in Pavilion KL and ongoing reposition of mall and tenant in Damen.

• YTD, growth in revenue (+10.2% ) is attributable to the newly acquired assets. Nevertheless, net profit was marginally higher by 0.1% due to the high expenses and borrowing.

• Major repositioning of tenants at Pavilion KL is expected to continue for another two quarters to enhance tenant mix with some tenants moving to the Pavilion Extension (200k+ sq ft) with partial loss of income expected; while renewals are not a cause of concern due to the strong footfall in prime location with strong branding.

• On the two new properties, we understand that it will take time to mature given management’s ongoing repositioning strategy and promotional activities to attract the targeted footfall and grow the assets; hence we look forward to FY17 horizon in order for the assets to perform to its potential.

Risks

• Highly sensitive to downturn in consumer spending.

• Intensifying competition on retail space.

Forecasts

• We lower our rental income assumption for Damen and resulting in net profit forecast for FY16 lowered by 2.1%.

Rating

BUY ↔, TP: RM1.95 ↔

• We continue to like PREIT view of income growth potential in FY17 coming from Da:men and The Intermark and organic growth from positive rental reversion from its huge NLA expiry (69%) in 4QFY16. We expect double digit income growth on the back of full contribution of newly acquired assets, which account for circa 30% of total portfolio NLA. Near-term potential asset injection pipeline includes Pavilion Extension and Farenheit Mall.

Valuation

• Maintain BUY rating with unchanged TP of RM1.95 based on FY17 forecasted DPU.

• 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 - 28 Oct 2016