2Q15 results met estimates. Maintain NEUTRAL and DDM-based TP of MYR1.55 (0.6% upside). DPU grew 6.8% YoY on the back of positive rental reversions from newly-refurbished areas and higher service charges to tenants. While management expects consumer sentiment to remain soft, Pavilion KL Mall’s position as one of the premium malls and its affluent catchment are expected to mitigate the impact.

In line. Pavilion REIT’s (PavREIT) registered 2Q15 core profit of MYR59.3m (-2% QoQ, +6.6% YoY), bringing 1H15 core profit to MYR119.8m, in line with expectations at 48%/51% of our/consensus estimates. A DPU of 2.03 sen was proposed for the quarter. This translates to 1H15 DPU to 4.09 sen, which will be paid out on 8 Sep. Earnings for the quarter were mainly underpinned by Pavilion Kuala Lumpur’s (Pavilion KL Mall) stable rental reversions from areas that underwent asset enhancement works back in 2014. Gearing as of 2Q15 stood at 15.2%. Additionally, its occupancy rate remains healthy at 98.5% for Pavilion KL Mall and 87% for Pavilion Tower.

Recent updates. Management shared that retail sales declined by 30% QoQ post the goods and services tax (GST) implementation, which is in line with management’s expectation. The GST impact was mainly on luxury items such as jewellery and watches. The REIT also added that it has managed to secure two new tenants for Pavilion Tower. The tenants - a developer and a construction company, are expected to boost the occupancy rate to 93% by end-4Q15 and contribute positively to the REIT from next year onwards. On the other hand, management stated that the progress of Pavilion KL Mall’s extension is on track and is expected to be completed in 2H16. As for its sponsor’s asset Da:men in Subang Jaya, the mall is expected to be completed in 3Q15. However, the sponsor did not provide any timeline or indication of whether the asset will be injected into the REIT.

Forecasts and risks. We keep our forecasts. Key risks include: i) prolonged soft consumer sentiment; ii) lower-than-expected rental reversions and iii) lower-than-expected occupancy rate.

Maintain NEUTRAL. We maintain our NEUTRAL call and DDM-based TP of MYR1.55. Despite the current soft consumer sentiment, we expect organic growth to remain stable at c.4% going forward, leveraging on Pavilion KL Mall’s position as one of Malaysia’s few premium shopping centres. Dividend yield is decent at 5.7% FY16F.

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Company Profile

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

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Source: RHB Research - 31 Jul 2015