Pavilion REIT’s 1QFY13 results were in line with our and consensus estimates. Net profit grew 13.5% y-o-y and 7.8% q-o-q, mostly attributed to the positive impact from its new Fashion Avenue. No dividend was declared as distributions are made semi-annually. We reiterate that the REIT’s next earnings kicker will likely be its major rental renewals in 3QFY13. Maintain NEUTRAL with an unchanged target price of MYR1.66.

In line. Pavilion REIT’s (PavREIT) 1QFY13 gross revenue of MYR94.8m (+11.0% y-o-y; +3.2% q-o-q) and net profit of MYR54.3m (+13.5% y-o-y; +7.8% q-o-q) came in line with our and consensus estimates. As expected, no dividend was declared during the quarter as PavREIT distributes its dividends semi-annually.

Reaping the benefit from Fashion Avenue. PavREIT’s strong topline and bottomline growth was mostly attributed to the commencement of Pavilion Mall’s new Fashion Avenue precinct (opened in 3QFY12). To recall, the opening of Fashion Avenue has seen the doubling of rental revenue from the area which was previously tenanted by an anchor tenant, CK Tang. Other earnings growth contributors include: 1) the full occupancy for Pavilion Tower from 3QFY12 onwards; and 2) y-o-y interest savings of MYR0.6m due to the conversion of PavREIT’s long-term debts to floating rates from fixed rates.

Upcoming major lease renewals could surprise on the upside. We reiterate that PavREIT’s next earnings kicker will likely be its major lease renewals in 3QFY13, where more than 60% of Pavilion Mall’s NLA will be due for renewals. Given the mall’s strong position as one of Malaysia’s leading shopping malls, we believe that there could still be an upside surprise to its rental rates. Furthermore, its average rental rate of MYR18.74 psf (as at end-4Q12) is still trailing that of Suria KLCC, which is commanding average rentals of about MYR25 to MYR30 psf.

Forecasts. Unchanged.

Investment case. We maintain NEUTRAL on PavREIT, with an unchanged target price of MYR1.66. PavREIT remains our top pick for the MREIT sector. We continue to like PavREIT for: 1) its quality assets and prime location; 2) its strong organic growth potential; and 3) quality of its tenants.

Source: RHB