INVESTMENT HIGHLIGHTS

• FY17 earnings in-line with our expectation

• Core net income fell -2% due to higher expenses

• Higher borrowing cost to have to have an impact of -1.1% on FY18 EPU estimates

• Maintain Neutral with a lower TP of RM1.68 (from RM1.70 previously)

FY17 earnings in-line with our expectation. Pavilion REIT’s full year core net income (CNI) of RM230.3m met our expectation, making up 101% of our FY17 earnings forecast and 95% of consensus’. The interim DPU of 4.3 sen brought total DPU to 8.2 sen, which is within expectation.

Core net income fell -2% due to higher expenses. Although revenue increased by 6.6% yoy due to higher NPI, Pavilion REIT’s CNI slipped by 2% to RM230.3m due to higher property and non-property expenses. The higher yoy revenue is largely attributed to higher rent from Pavilion Kuala Lumpur after its tenant reconfiguration. The higher income is also helped by electricity collection fees from da:mén USJ mall.

Higher borrowing cost to have to have an impact of -1.1% on FY18 EPU estimates. Following the announcement of the 25 bps rate hike by Bank Negara, we have imputed higher borrowing cost as 79% of Pavilion REIT’s loans are based on floating rates. Other than that, we keep our other assumptions unchanged. Our estimates have not taken into consideration of the income from Pavilion Elite, which is expected to be completed in 1HFY18.

Rental rates expected to hold up well. Among its assets, Pavilion REIT has 51% of tenant up for agreement renewal at da:mén USJ mall. The major tenants such as Jaya Grocer, Al Hannan Events and The Canteen will continue the tenancy agreement. We expect a flat rental reversion for da:mén USJ mall due to the competition among neighbourhood malls. As for Pavilion KL, tenancy expiry based on NLA is estimated at 14% in FY18, 20% for The Intermark Mall and 37% for Pavilion Tower, which should be manageable. We expect a mid singledigit rental reversion for Pavilion KL and lower single-digit rental reversion for the other assets.

Source: MIDF Research - 26 Jan 2018