Pavilion REIT’s 9M14 results came in line with expectations at 76/77% of our/consensus  estimates.  Net  property  income  (NPI)  margin  saw  an improvement to 70.4% in 9M14 (1H14: 68.4%) due to 3Q14’s lower cost base. Earnings will continue to be driven by its organic growth through more  asset  enhancement  exercises.  Maintain  NEUTRAL,  with  an unchanged DDM-based TP of MYR1.48 (0% upside). 
 
In  line.  Pavilion REIT’s (PavREIT)  3Q14  core  net  profit  of  MYR63.0m (+19.0%  YoY,  +13.0%  QoQ)  brought  9M14  net  profit  to  MYR175.3m (+10.1% YoY), making up 76/77% of our and consensus  estimates.  9M revenue  growth  remained  healthy  at  8.0%  YoY,  driven  by  the  positive rental reversion from Pavilion KL Mall’s (PavMall) major rental renewal and  newly-completed  renovations.  As  expected,  9M14  NPI  margin improved to 70.4% (1H14: 68.4%) as the cost base was lower in 3Q14, attributable to: i) a writeback in assessment expenses as Kuala Lumpur City  Hall  (DBKL)  revised  its  assessment  rate  hike  to  only  25%  (from 100%),  effective  July,  and  ii)  the  recognition  of  credit/overcharge  of electricity  charges  on  one  of  the  electricity  metering  systems.  No 
dividend was declared for 3Q14. Nonetheless, its distributable income of MYR64.9m translates into a DPU of 2.16 sen.

Reaping  the  benefit  of  refurbishments.  PavMall  Level  7’s  asset enhancement  initiative  (AEI),  which saw the relocation of its “Beauty Hall” precinct to a more prominent area, has led to an improvement in rental  rates  from  these  tenants,  as  well  as  improved  traffic  footfall. Shopper  traffic  has  also  improved  on  Level  2,  where  the  REIT  has converted  some  empty  spaces  into  retail  areas  and  introduced  new international  luxury  brands  such  as  Tory  Burch.  The  renovation  of  the vacated area on Level 7 is due for completion in November, and will see the introduction of more food and beverage tenants to drive traffic flow.

Earnings  forecasts.  Our  FY14/15F  earnings  are  maintained  for  now. We have also introduced our FY16 figures.

Maintain  NEUTRAL.  Our  DDM-based  TP  is  unchanged  at  MYR1.48.  PavREIT’s short-term  growth  would  continue  to  be  driven  by  its  asset enhancement initiatives and PavMall’s position as one of Kuala Lumpur’s few premium malls.

Financial Exhibits

SWOT Analysis

Company Profile

Pavilion REIT is a retail-focused REIT in Malaysia, and owner of the iconic Pavilion KL Mall.

Recommendation Chart

Source: RHB