3Q15 results met estimates. Upgrade to BUY, with a DDM-based TP of MYR1.69 (12% upside). While it expects consumer sentiment to remain soft, Pavilion KL Mall’s position as one of Malaysia’s premium malls and its affluen catchment are anticipated to mitigate the impact.Additionally, we expect the REIT’s recently-proposed Da:men USJacquisition to bolster earnings growth going forward.

In line. Pavilion REIT’s (PavREIT) registered a 3Q15 core profit of MYR60.5m (+2% QoQ, -4.2% YoY), bringing 9M15 core profit to MYR180.3m, in line with expectations at 74%/76% of our/consensus estimates. A distribution per unit (DPU) of 2.07 sen was proposed for the quarter, which brings YTD DPU to 6.16 sen. Earnings for the quarter were mainly underpinned by Pavilion Kuala Lumpur’s (Pavilion KL Mall) stable rental revenue, contributed by areas that underwent asset enhancement works back in 2014. However, total property expenses were higher (+4.3% YoY) due to the higher maintenance cost incurred over its floor upgrading exercise at Level 1 and recognition of credit overelectricity charges by TNB last year.

Recent updates. Management reiterated that weak consumer sentiment persisted during the quarter. With the recent weakening of MYR against the USD, retailers have been increasing prices due to the increase in import cost, which resulted in lower consumption. That said, management is committed to increasing its marketing efforts to boost local and foreign shopper traffic to the mall and encourage spending. Additionally, we expect the REIT’s future earnings growth to be bolstered by the recently-proposed acquisition of Da:men retail mall in Subang Jaya, which will be completed in 1Q16.

Forecasts and risks. Unchanged. Key risks include: i) prolonged soft consumer sentiment; ii) lower-than-expected rental reversions, and iii) a lower-than-expected occupancy rate.

Upgrade to BUY. Given the 12% upside to our DDM-based MYR1.69 TP, we upgrade our call to BUY (from Neutral). We believe that despite the current weak consumer sentiment surrounding the retail market, PavREIT will still be able to maintain its DPU growth over the next 12 months, especially with the proposed acquisition of Da:men. Additionally, its dividend yield also remains decent at above 6% for FY16F-FY17F.