Pavilion Real Estate Investment Trust (Aug 7, RM1.36)
Maintain hold at RM1.34 with revised target price of RM1.40 (from RM1.26): Net profit for the first half of the financial year ending Dec 31, 2012 (1HFY12) of RM95.6 million was above expectations at 55% to 56% of our and the street’s full-year forecasts due mainly to higher than expected retail turnover rent and rental hikes.
We raise our FY12 to FY14 earnings forecasts by 8% to 8.4% to factor in a higher rental growth and turnover rent as well as higher occupancy rate of 99% (from 98%). Our new discounted cash flow-based target price is RM1.40 (+14 sen). Pavilion REIT currently offers 4.9% yield (gross) against CapitaMalls Malaysia Trust’s 4.9% and Sunway REIT’s 5.3%.
Net profit for the second quarter (2Q) was RM47.8 million (-0.1% quarter-on-quarter [q-o-q]) on the back of lower revenue of RM82.8 million (-2.9% q-o-q).
The marginal decline in earnings was due to the closure of the former Tangs department store space (5% of total net lettable area) for reconfiguration since March this year and a 12% decline in other income (turnover rent and advertising income, for example), partially offset by an improvement in net property margin (+1.6%). Pavilion REIT has declared a 3.4 sen gross dividend per unit (DPU) for 1H, above our expectation.
To recap, the management has decided to reconfigure the low yielding former Tangs space into a new high street fashion precinct to enhance rental yields.
The new fashion precinct, which is more than 90% taken up with 35 new tenants, will officially open in early September. New tenants include international brands such as Armani Jeans, Luxenter, Ben Sherman and Longines.
Pavilion Tower (2.2% of total net property income) has been fully tenanted and will be fully occupied by early September (currently 88% occupied).
As at June this year, Pavilion REIT’s gearing ratio remained healthy at 0.19 times, implying debt headroom of RM2.4 billion before the need to raise funds on the equity market for future acquisitions.
Piling for the Pavilion KL Mall extension will commence by 3Q while the construction of the suburban mall in Subang Jaya is ahead of schedule. As for farenheit88 mall, the management is monitoring the leases due for renewal in 3Q, rental reversions and tenancy profile.
When acquired, we expect these properties to raise Pavilion REIT’s asset size by 41% from RM3.6 billion now. — Maybank IB Research, Aug 7
This article appeared in The Edge Financial Daily on August 8, 2012.