Results

• Reported 1QFY17 gross revenue of RM118.9m (+1.3% qoq, +11.5% yoy) and normalized net profit of RM57.0m (+3.9% qoq, -7.2% yoy), accounting for 23.1% and 22.4% of HLIB and consensus estimates respectively.

Deviations

• Slightly below expectations due to higher than expected borrowing costs.

Dividends

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

Highlight

• Gross revenue increased by 11.5% yoy due 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.
• Property operating expenses increased by 29% yoy mainly due to the routine operating expenses incurred for the two new properties and the replacement of lift and escalator parts at the Intermark Mall.
• Total capex spent during the quarter was RM1.1m, mainly for upgrading works in Pavilion KL and improvement of tenancy lots and creation of additional food and beverages kiosks at the Intermark Mall.
• Major tenant repositioning exercise in Pavilion KL is expected to be concluded in 1QFY17. As a result we expect the rental income to normalise from 2QFY17 onwards.
• A rental reversion rate of 7% was achieved for the major lease expiry in FY16. However, we understand that rental reversion rate is expected to be flattish (2-3%) in FY17 as the remaining rental renewals for this year comprise of smaller-sized lots.

Risks

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

Forecasts

• We reduce FY17-18 earnings forecasts by 2.2% and 2.1% respectively after incorporating higher borrowing cost assumptions.

Rating

HOLD ↔ , TP: RM1.84 ↑

• While we continue to like Pavilion REIT due to Pavilion KL prime location and strong footfalls, we are of the view that it takes time for the two new properties (Damen and Intermark) to mature and hence drag the near-term performance of the REIT. Nevertheless, near-term potential injection of Pavilion Elite is expected to be favourable.

Valuation

• Whilst there are changes to our earnings forecast, we maintain HOLD recommendation with higher TP of RM1.84 (from RM1.77) as we roll forward our valuation horizon from FY17 to FY18 with unchanged targeted yield of 5.2%.

Source: Hong Leong Investment Bank Research - 28 Apr 2017