Pavilion REIT net profit forecasts raised on da:men

Pavilion Real Estate Investment Trust (REIT) (Oct 30, RM1.51)

Maintain buy with a higher target price (TP) of RM1.75: The third quarter ended Sept 30, 2015 (3QFY15) net profit was RM60.5 million (-4.0% year-on-year, y-o-y; +2.0% quarter-on-quarter), bringing nine-month net profit ended Sept 30, 2015 to RM180.3 million (+2.8% y-o-y) and accounting for 79%/74% of our/consensus full-year estimates. The profit was above our expectation, but in line with consensus. This was mainly due to lower-than-expected interest expense.

Its lower 3QFY15 y-o-y earnings were mainly attributed to higher quit rent and assessment expenses (3QFY15: RM2.7 million versus 3QFY14: RM200,000) and utility costs (+28.7% y-o-y). This has nudged down 3QFY15’s net profit margin by 3.1 percentage points to 59.0%, as compared with 3Q14. Elsewhere, 3QFY15’s flattish revenue growth of +1.0% y-o-y was only slightly below our minimal FY15 revenue growth forecast of +2.2% y-o-y, as we believe that only about 15% of Pavilion Mall’s net lettable area is due for renewal in financial year ending Dec 31, 2015 (FY15). There was no dividend declared in 3QFY15 due to Pavilion REIT’s biannual dividend policy.

We raise FY15/FY16/FY17 net profit forecasts by 3.1%/6.9%/1.8% after factoring in the revenue contribution from da:men USJ retail mall from 2QFY16 onwards (expected acquisition completion by 1QFY16), based on occupancy rate of 85% and average monthly rental rate of RM9.20 per sq ft; and lower FY15 interest costs by about RM5 million.

We maintain “buy” with a higher discounted cash flow-based TP of RM1.75 (+5 sen; weighted average cost of capital: 7%, terminal yield: 6.5%). We like Pavilion REIT for its resilient earnings and visible pipeline of prime assets in the Klang Valley. — Maybank IB Research, Oct 30

Check out USJ properties HERE.

This article first appeared in The Edge Financial Daily, on Nov 2, 2015. Subscribe to The Edge Financial Daily here.