INVESTMENT HIGHLIGHTS

• 9MFY17 earnings within our expectation

• Lower earnings due to higher expenses

• Earnings forecast maintained

• Maintain Neutral with a TP of RM1.70

9MFY17 earnings within our expectation. Pavilion REIT 9MFY17 core net income of RM166.8m came in within our expectation, meeting 72% of our full year earnings forecast. Nevertheless, the earnings fell short of consensus expectation after making up only 67% of consensus full year estimates as consensus may have underestimated the increase in property expenses of Pavilion REIT. No distribution per unit was announced for 3QFY17 due to its bi-annual distribution policy.

Lower earnings due to higher expenses. Pavilion REIT recorded 3.2%yoy growth in 3QFY17 topline, mainly driven higher rental income from Pavilion KL shopping mall. Nevertheless, core net earnings in 3QFY17 declined by 6.7%yoy mainly due to higher maintenance cost incurred for Pavilion KL shopping mall such as upgrading air conditioning system. That brought cumulative earnings in 9MFY17 to RM166.8m, declining by 7.5%yoy as higher property expenses coupled with higher borrowing cost offset the rental contribution from Intermark Mall and da:mén USJ mall. The lower cumulative earnings were also partially dragged by lower occupancy rates of Pavilion KL shopping mall in 1QFY17 due to reconfiguration of tenant mix.

Earnings forecast maintained. We maintain our earnings forecast for FY17/18. Earnings of Pavilion REIT is expected to remain subdued for FY17 due to high property expenses incurred. Nevertheless, the recently announced acquisition of Elite Pavilion Mall (NLA: 242k square feet) is expected to be earnings accretive. Note that our earnings forecast is yet to include contribution from Elite Pavilion Mall pending completion of the acquisition.

Maintain Neutral with a TP of RM1.70. We are maintaining TP for Pavilion REIT at RM1.70, based on dividend discount model. We continue to see unexciting earnings outlook for Pavilion REIT, hence we are maintaining our Neutral stance on the company. Meanwhile, dividend yield estimate for Pavilion REIT is at 4.1%.

Source: MIDF Research - 27 Oct 2017