Results

• 4Q17 normalised net profit of RM65.3m (QoQ: +17.9%; YoY: +19.1%) ended FY17 with RM232.1m (-1.3% YoY). The results were in line, accounting for 100.6% and 95.0% of ours and consensus full year estimates respectively.

Deviations

• None.

Dividends

• Declared final DPU of 4.28 sen (4Q16: 4.08 sen), which brings FY17 DPU to 8.24 sen (FY16 DPU: 8.24 sen).

Highlights

• QoQ: Normalized net profit increased by 17.9% to RM65.3m mainly due to increase in other income with regards to higher advertising income and fees received from Damen Mall’s electricity provider.
• YoY: Normalized net profit increased by 19.1% due to higher rental income from Pavilion KL Mall (Pavilion Mall) and the increase in other income.
• FY17: Net profit decreased slightly by 1.3% to RM232.1m due to routine operating expenses incurred for the new properties and higher maintenance cost incurred at Pavilion Mall and Intermark Mall. This was partially offset by higher rental income from Pavilion’s tenants after the repositioning exercise.
• Gearing and occupancy rate: Gearing remained healthy at 25.9% and overall occupancy rate of Pavilion REIT 4 properties is stable at 93.3%.
• Outlook: We expect performance of Pavilion REIT to normalize in FY18 due to completion of tenant’s renovation and upgrading works in Pavilion Mall.

Risks

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

Forecasts

• Unchanged.

Rating

BUY ↑, TP: RM1.74 ↔

• We opine that current share price provides an attractive opportunity for accumulation due to Pavilion Mall’s prime location and strong footfalls. Moreover, Pavilion REIT is supported by attractive 5.4% yield and investors can enjoy inorganic growth brought by injection of Pavilion Elite in the near term.

Valuation

• Upgrade to BUY recommendation with unchanged TP of RM1.74 based on unchanged targeted yield of 5.4%.

Source: Hong Leong Investment Bank Research - 25 Jan 2018