PavREIT’s 1Q15 results came in line with estimates. Maintain NEUTRALand a DDM-based TP of MYR1.55 (2% downside). DPU grew 6.2% YoY on the back of positive rental reversions from newly-refurbished areas and higher service charges to tenants. Management remains cautious on the retail sales growth post-GST implementation, although it expects this to be temporary and revenue to remain stable throughout the year.

• In line. Pavilion REIT’s (PavREIT) 1Q15 core profit of MYR60.5m (+6% QoQ, +6.8% YoY) were in line, at 25% of our and consensus estimates.A distribution per unit (DPU) of 2.06 sen was proposed for the quarter,which will be paid out with the 2Q15 DPU, in line with its semi-annual payout policy. Earnings for the quarter were underpinned by Pavilion Kuala Lumpur’s (PavMall) stable rental reversions, higher service charges from May 2014 and the introduction of new tenants from its refurbishment exercise in FY14. This was further boosted by the pregoods and services tax (GST) spending during the quarter. Based on our checks with management, its occupancy rate remains healthy at 99% for PavMall and 80% for Pavilion Tower.
• Recent updates. During our recent visit, management reiterated that it expects the PavMall extension to be completed by end-2016. Additionally, the connecting tunnel that will link the 250,000 sq ftextension to Fahrenheit 88 has also been completed – although this will only be opened once the extension is operational. According to management, the tunnel will likely host convenience stores and some retail stores in the future. Similar to its peers, the REIT expects slower retail sales growth in 2Q15 following the implementation of the GST, although it expects overall growth to remain stable this year.Management has committed to a gift redemption campaign with PavMall’s retailers in an effort to sustain sales and shopper traffic. As for Pavilion Tower, the REIT will continue to face challenges in securing new tenants over the short term, given the current soft market.
• Forecasts. Maintained.
• Maintain NEUTRAL. We maintain our NEUTRAL call and DDM-based TP of MYR1.55 on PavREIT. While it may continue to face some hiccups in the short term, organic growth should remain stable at c.4% going forward, given PavMall’s position as one of Malaysia’s few premium shopping centres.