INVESTMENT HIGHLIGHTS

• 1QFY17 earnings within expectations

• Weaker core net income

• Earnings estimated maintained

• Maintain Neutral an unchanged TP of RM1.77

1QFY17 earnings within expectations. Pavilion REIT 1QFY17 core net income of RM57m came in within expectations, accounting for 21.4% and 21.6% of our and consensus full year estimates respectively.

Weaker core net income. Pavilion REIT recorded higher 1QFY17 revenue of RM118.9m (+11%yoy), underpinned by rental contribution from Intermark Mall and da:mén USJ mall. Recall that Pavilion REIT completed the acquisition of the two malls in March 2016. Nonetheless, 1QFY17 core net income was marginally weaker (-7%yoy), owing to higher borrowing cost (+78%yoy) and higher property expenses (+29%yoy). Meanwhile, lower earnings contribution from Pavilion KL shopping mall was also contributed to the weaker earnings. Note that 1QFY17 net property income from Pavilion KL shopping mall dropped 3%yoy due to reconfiguration of tenant mix in Pavilion KL shopping mall following the opening of Pavilion Elite. Nevertheless, we expect rental contribution from Pavilion KL shopping mall to normalise from 2QFY17 onwards following the completion of tenant mix reconfiguration.

Earnings estimated maintained. We are keeping our earnings estimate for FY17-18. We are maintaining our rental reversion expectation of +5% for Pavilion KL shopping mall due to its prime location in Bukit Bintang KL. On the other hand, we only expect marginal improvement in Intermark Mall and da:mén USJ retail mall in FY17 as the malls are undergoing reconfiguration of tenant mix.

Maintain Neutral with an unchanged TP of RM1.77. Our TP is based on Dividend Discount Model (DDM) valuation (Required rate of return: 7.1%, perpetual growth rate: 1.6%). Near-term catalysts for Pavilion REIT include the potential injection of Pavilion Elite (NLA: 250k sf) in FY17

Source: MIDF Research - 28 Apr 2017