INVESTMENT HIGHLIGHTS

• FY16 earnings within expectations

• Marginally lower core net income despite higher topline

• Earnings estimated maintained

• Maintain Neutral a revised TP of RM1.77

FY16 earnings within expectations. Pavilion REIT FY16 core net income of RM235m was within expectations, accounting for 98% and 96% of our and consensus full year estimates respectively. Distribution per unit (DPU) of 2.02sen was declared, bringing total DPU to 8.24sen per share in FY16 which implies net yield of 4.1%.

Marginally lower core net income despite higher topline. FY16 revenue of Pavilion REIT was higher at RM460m (+11%yoy), mainly due to contribution from newly acquired Intermark Mall and da:mén USJ mall. Nevertheless, core net income was weaker marginally at RM235.3m (-2.3%yoy) mainly due to higher property expenses (+18.4%yoy) and higher borrowing cost (+89%yoy). Note that Pavilion REIT incurred higher borrowing cost as it funded its assets acquisitions via borrowings. Meanwhile, the weaker earnings were also partly due to lower occupancy rates in Pavilion shopping mall. Occupancy rates of Pavilion shopping mall dropped to 95.8% as at Dec 2016 from 98.5% as at Dec 2015 due to reconfiguration of tenant mix following the opening of Pavilion Elite. Management expects the reconfiguration of tenant mix to be completed by 1QFY17 and occupancy rates should normalized from 2QFY17 onwards.

Earnings estimated maintained. We maintain our earnings forecast for FY17. We are estimating earnings growth of 12%yoy for FY17 mainly on expected higher earnings contribution from Pavilion shopping mall. Pavilion shopping mall is expected to perform steadily due to its prime location while we are maintaining our rental reversion estimation of +5% for FY17. Meanwhile, we are estimating gradually improving contribution from Intermark Mall and da:mén USJ retail mall in FY17-18 while we reckon the assets may require longer gestation period to mature.

Maintain Neutral with a revised TP of RM1.77 (previously: RM1.68). This is based on Dividend Discount Model (DDM) valuation (Required rate of return: 7.1%, perpetual growth rate: 1.6%). Our TP was revised higher after we rolled over our valuation to FY17. Potential short-term catalysts are injection of Pavilion Elite and Fahrenheit 88 to Pavilion REIT

Source: MIDF Research - 20 Jan 2017