PavREIT’s FY14 results came in line with estimates. Maintain NEUTRAL with a revised TP of MYR1.55 (6% upside). Full-year DPU grew 8.2% YoY on the back of positive rental reversions and  higher service charges to tenants.  Going  into  2015,  management  is  cautious  on  the  outlook  for the  retail  segment  due  to  the  GST  and  macroeconomic  factors, although it expects revenue growth to remain stable. 

In line.  Pavilion REIT’s (PavREIT)  FY14  core  net profit of  MYR232.4m (+8.5% YoY)  came  in line with  our and consensus  estimates.  Full-year net property income  growth was  healthy at 7.5% YoY, driven by positive rental  reversions,  newly-completed  renovations  at  Pavilion  KL  Mall’s (PavMall),  and  higher service  charges  to  tenants in  PavMall.  This  was despite a 6.2% increase YoY in property expenses due to higher utilities and assessment expenses.  The REIT announced a DPU of 1.96 sen for 4Q14, bringing total DPU to 7.96 sen, up 8.2% YoY. Despite 2014 being a  challenging  year  for  tourism,  PavMall  still  managed  to  record  a commendable YTD retail sales growth of 5.7% (up until Nov 2014).

Cautious 2015 outlook. Management expects retail sales to be affected by the impending implementation of  the goods and services tax (GST)  in April and  the volatile macroeconomic environment.  That said,  it  remainsoptimistic on achieving  retail sales growth of 3-5% for FY15.  In addition, with more than 90% of its rental based on fixed rental, we expect overall revenue  growth  to  remain  stable  in  FY15.  Acquisitions  are  unlikely  to materialise  this  year,  although  the  REIT  is  keeping  a  close  eye  on  itsSponsor’s asset, da:men in USJ, which is due to be completed in 3Q15.MYR34m of capex has been budgeted for FY15, and the bulk of this will be  spent  on  improving  the  efficiency  of  PavMall’s  air-conditioning systems as a way to manage its rising utilities expenses.

Earnings forecasts.  We revise  our FY15/16  earnings  forecasts  slightly(<1%)  after  updating  FY14  figures.  We  also  introduce  our  FY17 numbers.

Maintain NEUTRAL.  Our DDM-based  TP  is revised to MYR1.55 (from MYR1.48) after rolling over our base period and revising some of our key parameters in line with the house view.  Despite the uncertainty over the GST impact on retail sales, we still prefer the retail segment for exposure to the MREIT sector given its higher annual rental growth of about 5% vs about 1-3% for the other segments.

Key highlights from conference call

Cautious 2015 outlook.  Management expects retail sales to be affected by the impending implementation of the  GST  in April and the volatile macroeconomic environment.  Management  anticipates  retail  sales  to  pick  up  in  the  months leading up to the GST, followed by a slowdown in the first 6 -9 months post-GST. That said, it remains optimistic on achieving retail sales growth of 3-5% for FY15. In  addition,  with  more  than 90%  of  its  rental  based  on  fixed  rental,  we  expect overall revenue growth to remain stable in FY15.  Management has also stated that the  GST implementation  should  have  no  impact on earnings as the tax will be passed on to tenants, who will then pass the tax onto end-consumers. 

Acquisitions  unlikely  to  materialise  this  year.  The  REIT  is  not  expected  to make  any  acquisitions  this  year,  although  it  is  keeping  a  close  eye  on  its Sponsor’s asset, da:men in USJ, which is due to be completed in 3Q15.  Based on  information  that  it  has,  about 50%  of  da:men’s  space  has been  leased out thus  far.  Nonetheless,  management  is  waiting  for  the  asset  to  commence operation  before  deciding  to  inject  it  into  the  REIT.  It  is  still  looking  at  the potential of Fahrenheit88, although there has been no indication that this will be injected  into  the  REIT  as  yet.  The  Pavilion  Extension  is  still  on  track  for completion  in  mid-2016,  which  should  provide  the  REIT  with  another  potential asset injection.  However, we note that management remains prudent on future acquisitions,  and  will  only  consider  an  asset  for  injection  into  the  REIT  if  the asset’s yield is between 7% and 7.5%.

Source: RHB