Pavilion REIT  (PREIT)  continued  to record double-digit  y-o-y net profit growth  in  9MFY13,  boosted  by  incremental  earnings  from  Pavilion Mall’s  Fashion  Avenue  and  full  occupancy  at  Pavilion  Tower.  This growth  trend  is  likely  to  continue  into  4QFY13,  spurred  by  the anticipated higher sales during the upcoming  festive  season. Maintain NEUTRAL and unchanged FV of MYR1.50.

• Still chalking up double-digit net profit growth.  PREIT’s 9MFY13 net profit  of  MYR159.2m  (+10.3%  y-o-y)  was  in  line  with  expectations. Pavilion Mall  (PavMall)’s new  Fashion Avenue  as well as full occupancy at Pavilion Tower continued to drive earnings growth.  The sequential net profit growth was also boosted by a higher advertising income as well as percentage  of  rent income in relation to the higher sales generated by mall  tenants.  The  REIT  did  not  declare  a  distribution  for  3Q13  as  it distributes its dividends semi-annually.
• An  update.  Management had  previously indicated that PavMall’s major renewal  for  about  62%  of  total  NLA  is  progressing  well.  We  view  the vacancy  risk  as  minimal,  and  any  non-renewal  should  provide opportunities  to  adjust  its  tenant  mix.  We  maintain  our  3-year  rental growth forecast  of  15%, in line with management’s  guidance.  We note that there  may be a slight dip in revenue reported by the existing tenants in  4QFY13  as  some  of  them  took  the  opportunity  to  renovate  their premises after renewing their tenancy.  Generally,  lots under renovation do not generate  income. Nonetheless, we believe that the kick ing  in of positive rental reversions  on  some tenancies as well as the anticipated higher sales during the upcoming school holidays and Christmas season will be sufficient to sustain PREIT’s earnings growth in 4Q13.
• Maintain  NEUTRAL and  DDM-based FV of  MYR1.50. Although we still like  the  REIT’s  asset  quality,  we  believe  that  investors  have  already priced in all of PREIT’s short-term catalysts. We reiterate that  the REIT’s inorganic  growth  would  only come  in  at  end-2014  or  early-2015,  when some of its pipeline assets are to be injected.

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Company Profile
Pavilion REIT is a retail-focused REIT in Malaysia which owns the iconic Pavilion KL Mall.

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Source: RHB