Higher Spending Cap Gains From Repositioning

Although Pavilion REIT (PREIT) has started to reap the benefits of the repositioning exercise for its Pavilion KL Mall, overall realised net profit for 3QFY17 is still down by 6.7% yoy, due to higher maintenance and marketing cost related to Pavilion KL and also lower yield from its DA MEN Mall. Despite results falling below expectations, as realised 9MFY17 net profit only accounted for around 65% of our respective forecasts, we are still optimistic about PREIT’s outlook due to the impending injection of Pavilion KL Mall Extension (Pavilion Elite).

Reaping the Benefits From Repositioning of Pavilion KL Mall

Despite gross revenue for Pavilion KL Mall being higher by 2.5% qoq, the NPI for the asset only grew by a mere 0.9% in 3QFY17. The stronger gross revenue growth can be attributed to the recent repositioning of the tenants around the mall (the refurbishment/relocation has yet to be completed), however the recent increase in expenses has capped the upside from the stronger revenue growth. However, as spending patterns normalise, we are expecting stronger NPI growth in the coming quarters. Pavilion KL Mall contributed around 91% of the REIT’s NPI in 9MFY17.

Intermark Is Doing Great; But DA MEN Not So

Although the Intermark Mall and DA MEN is relative insignificant to the Pavilion assets (Mall + Tower), contributing less than 7% of NPI in 9MFY17, performance of these assets will have an impact on the REIT’s, as a writedown in asset value will reduce its financial flexibility to gear up. The overall NPI trend for Intermark is encouraging, as NPI has grown by 42.3% yoy; however the NPI for DA MEN has declined by more than 65% yoy.

Maintain BUY and TP Unchanged at RM1.95

We reaffirm our BUY call, with unchanged DDM-based TP (of which already includes the injection of Pavilion Elite, estimated at 0.19 sen/share) of RM1.95 (7.6% cost of equity, 4% equity risk premium and 3.0% growth rate). The injection of Pavilion Elite, in our view, further enhances the REIT’s position as a prime retail REIT.

Source: Affin Hwang Research - 27 Oct 2017