PREIT’s  FY13  net  profit  rose  10%  y-o-y,  boosted  by  the  kicking  in  of positive  rental  reversion.  Management  is  turning  slightly  cautious  on 2014 as it expects retail sales growth to  be flattish, although earnings will still grow 5-10%  due to strong rental reversion.  The downside risks remain  as  PREIT  is  feeling  the  pinch  from  the  recent  electricity  rate hike. Maintain NEUTRAL for now, with a revised MYR1.45 FV.

• More  double-digit  growth.  PREIT’s  FY13  net  profit  of  MYR214.1m (+10%  y-o-y)  was  in  line  with  expectations.  Earnings  were  boosted  by the  kicking  in  of  positive  rental  reversion  as  well  as  incremental contribution from Fashion Avenue. The REIT declared a final DPU of 3.7sen, bringing total FY13 DPU to 7.36  sen  (+7.1% y-o-y).  This translates into a decent net yield of 5.1%.
• Slightly  cautious  on  2014  outlook.  Management  expects  retail  sales growth to be  flat  given the  cautious consumer sentiment,  although it still expects earnings to grow 5-10% in FY14, underpinned by positive rental reversion.  Meanwhile,  Visit Malaysia Year 2014  could  also  boost sales and  tourist  footfall.  Total  capex  for  2014  is  MYR27m,  which  will  be mostly  utilised  to  reconfigure  some  retail  space  in  Levels  2  and  7  of Pavilion  Mall.  We  are  positive  on  this  exercise  given  the  successful turnaround  of  the  Fashion  Avenue  space  previously.  PREIT  confirmed that it  has been  hit  by  recent  hikes  in  electricity and DBKL assessment rates, although it plans  to  pass on some or all of the incremental cost to the mall’s  tenants via higher service charges. Nonetheless, with average rental rates already breaching MYR20.90 psf (including MYR4.00 service charges),  management  is  awaiting  DBKL’s  decision  in  March  before assessing the possibility of raising service charges.
• Maintain  NEUTRAL,  with  a  revised MYR1.45  FV  (from MYR1.50)  after rolling over PREIT’s DDM valuation to FY14. FY14 earnings are down by a slight 1% after we revise our assumptions. We also introduce our FY15 numbers.  We  believe  that  PREIT’s  short-term  catalysts  are  already priced  in.  There  may  be  more  downside  risk  to  earnings,  pending DBKL’s  decision  on  assessment  rates  and  a  possible  slowdown  in consumer spending. Inorganic growth would only come in  the  earliest  at end-2014 or early 2015, when some pipeline assets are to be injected.

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Company Profile
Pavilion REIT (PREIT) is a retail-focused REIT in Malaysia and the owner of the iconic Pavilion KL Mall.

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Source: RHB