Results

• FY16 reported gross revenue of RM459.7m (+11.1% yoy) and normalized net profit of RM235.3m (-2.3% yoy), accounting for circa 96% of ours and consensus estimates.

Deviations

• None.

Dividends

• Declared final DPU of 4.08 sen (4QFY15: 4.14 sen), going ex on 2 Feb 2017. YTD dividend amounted to 8.24 sen (FY15: 8.23 sen) represents an annualized yield of 4.5%.

Highlight

• YoY: Gross revenue improved by 11.1% thanks to contributions from the newly acquired properties in Damen and Intermark, partly offset by lower revenue from Pavilion due to repositioning exercise. However, net profit was down 9.6% due to high opex and borrowing cost associated with those properties.
• QoQ: Revenue (-1.2%) and net profit (-7.6%) were lower affected by temporary loss of income from the repositioning of tenants in Pavilion KL.
• FY16: Growth in revenue (+10.1%) is attributable to the newly acquired assets. Nevertheless, net profit was marginally lower by 2.3% due to the higher expenses and borrowing cost.
• A rental reversion of 7% was achieved for the major lease expiry in FY16. Management shared a challenging year ahead in FY17 but is confident on the renewals. Management is targeting to manage majority of its debt under fixed interest rate instead floating moving forward.
• Partial loss of income is still expected in 1QFY17 with major tenant repositioning in Pavilion KL in order to enhance tenant mix following the opening of Pavilion Elite back in Nov 2016. Equity financing is on the cards as the acquisition of Pavilion Elite is expected in mid-2017.
• Whereas for Da:men, we understand that Parkson has come in as an anchor tenant and Container ArtBox will follow suit as part of the management?s ongoing repositioning strategy and promotional activities to grow the assets.

Risks

• Highly sensitive to downturn in consumer spending.
• Intensifying competition on retail space.

Forecasts

• We incorporate latest FY16 numbers and assumptions, resulting FY17F and FY18F net profit to lower by 4.7% and 2.5%, respectively.

Rating

HOLD ↓, TP: RM1.77 ↓

• Downgrade to HOLD as share price has gained 9% since our last upgrade in 06-2016 and is now less attractive vis-a- vis with current MGS yield. While we continue to like its income growth potential in FY17 and visible injection pipeline, we are of the view that the potential upside has been largely priced in. Nevertheless, near-term potential injection of Pavilion Elite is expected to be favourable.

Valuation

• TP is lowered from RM1.84 to RM1.77 based on FY17 forecasted DPU with 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 - 20 Jan 2017