Pavilion Real Estate Investment Trust (REIT)
(April 24, RM1.56)
Maintain hold with an unchanged target price (TP) of RM1.47: Gross revenue for the first quarter of the financial year ending December  (1QFY15)  of RM105.1 million was translated into normalised net profit of RM60.5 million, accounting for 25% and 25.1% of Hong Leong Investment Bank Bhd’s and consensus forecasts, respectively.

Dividends are normally declared semi-annually in 2Q and 4Q. Revenue for 1QFY15 grew by 4% year-on-year (y-o-y) after completion of asset enhancement works in 2014, coupled with higher service charge starting from May 2014.  Occupancy rates for mall and office were largely intact sequentially in the current quarter.

We are not overly concerned about the vacant space left by the previous anchor tenant in Pavilion Tower because the office  segment only contributes about 3% of total revenue for Pavilion REIT.

We understand that capital expenditure for FY15  will be approximately RM34 million, mainly to: (i) renovate the balance of toilets in the mall; (ii) renovate part of floor  space at Level 1, around the Gourmet Emporium area and; (iii) upgrade air-conditioning system in the mall to ensure more  efficiency in power consumption and distribution of airflow.

Tenancy sales for 1QFY15 have been stable. However, management said it is very slow in April as consumers tighten their  belts. We think that this will only be temporary as consumers will adjust their spending habits after a while. The  expiration of tenancies in FY15 for the mall and office is at 15% and 22% respectively.

Management views that there is no sign of non-renewal for the office segment while for the mall, there will be a slight  relocation and revision of tenant mix.

One of the top 10 tenants, Couch (M) Sdn Bhd’s tenancy is due in 3QFY15. We  maintain a “hold” recommendation on the equity and unchanged TP of RM1.47. Targeted yield remains at 5.7%, derived from  the historical average yield spread of Pavilion REIT and 7-year Malaysian government securities. — Hong Leong IB  Research, April 24

This article first appeared in The Edge Financial Daily, on April 27, 2015.