PavREIT’s growth prospects intact amid weak sentiment

Pavilion Real Estate Investment Trust
(Jan 15, RM1.56)
Maintain buy with a lower target price (TP) of RM1.72: Pavilion Real Estate Investment Trust’s (PavREIT) fourth quarter of financial year 2015 ended Dec 31, 2015 (4QFY15),  core profit of RM61 million (+7% year-on-year [y-o-y]) is in line with expectations. Revenue grew a decent 2.9% y-o-y despite weaker market sentiment, underpinned by a positive rental reversion stemming from the refurbishment works completed in 2014 for Pavilion Kuala Lumpur (PavMall). PavMall managed to chalk up a decent 5% to 6% retail sales growth between January and November 2015, partly attributed to pre-goods and services tax spending in 1QFY15. A final distribution per unit (DPU) of 2.07 sen was declared, bringing total FY15 DPU to 8.23 sen.

At a conference call, management was cautious about the outlook for the retail sector and expected consumer sentiment to only pick up in 4QFY16. It has also started PavMall’s tenancy renewals, since about 68% of its net lettable area is due to expire in September. About 11% of these tenancies have been renewed, with decent rental reversions of about 5%. PavMall will also be undergoing a repositioning exercise, as there are plans to move some tenants to the PavMall extension, which is due to commence operations in the second half of FY16. Management is targeting to inject the extension into the REIT by 4QFY16, barring any unforeseen circumstances. Management is still confident of wrapping  up the injections of da:men USJ and Intermark Mall by end-1QFY16. We are more positive on Intermark Mall’s potential given its ready catchment and strategic location. We note that da:men USJ finally opened on Jan 8, with occupancy at about 60% currently.

We trim our FY16F (forecast) to FY17F earnings by 5% after adjusting for FY15’s updated numbers. We also introduce our FY18 forecasts and maintain our “buy” call on PavREIT. Our dividend discount model-based TP is revised slightly to RM1.72 (from RM1.75) after our earnings revision. Despite the current weak consumer sentiment, PavREIT is likely to still be able to sustain its DPU growth, due to its inorganic growth potential. Key risks to our call include prolonged weak consumer sentiment and competition from newer malls.



This article first appeared in The Edge Financial Daily, on January 18, 2016. Tap here to subscribe for your personal copy.