Poised for further organic growth _PAVREIT

by **Cals** Mon 05 Aug 2013, 14:53

Poised for further organic growth
Business & Markets 2013
Written by Affin IB Research
Monday, 05 August 2013 12:00

[b style="line-height: 18px;"]Pavilion REIT[/b]
(Aug 2, RM1.44)
Maintain add at RM1.45 with a target price of RM1.61: For the first half of 2013 financial year (1HFY13), Pavilion REIT reported a realised net profit of RM106.2 million (+11.2% year-on-year [y-o-y]) on the back of gross revenue of RM185.9 million (+10.5% y-o-y).
KL Pavilion, which contributed 96.7% to Pavilion REIT’s topline, has seen a pick-up in occupancy rate to 99.5% in June 2013 from 94.6% in June 2012 following the completion of reconfiguration works at Fashion Avenue. The mall has also been chalking up higher average rental of about RM19 psf versus about RM17.9 psf in June 2012 despite relatively flat footfall and retail sales growth.
Pavilion Tower is currently 94% full after one of its largest tenants, Aker Engineering, vacated one of the five floors that it occupies.
Overall, results were within our expectations, but slightly above consensus’ estimates. Pavilion REIT declared an interim income distribution of 3.65 sen (against 3.36 sen in 1HFY12), which looks on track to meet our full year estimates of 7.5 sen (5.2% yield).
As expected, the second quarter (2Q) of FY13 was a seasonally weak quarter. Revenue declined by 3.8% quarter-on-quarter (q-o-q) to RM91.1 million, due to the lower income from percentage rent in relation to absense of any major festive holidays (1QFY13 — Chinese New Year). Earnings before interest and tax margin had, however, improved slightly to 64.1% against 63.9% in 1QFY13, attributed to higher maintenance costs for the scheduled progressive major replacement works in 1QFY13.
All in, 2QFY13 realised net profit fell by 4.3% q-o-q to RM52 million. On a y-o-y basis, 2QFY13 realised net profit rose by 8.8%, on the back of a 10% increase in revenue and a lower effective interest rate (4.2% versus 4.5% to 4.7% in 2QFY12). Interest expenses fell by 6.7% y-o-y due to the conversion of its long term debts from floating rate to fixed rate effective end-2012.
This year is a significant one for Pavilion REIT as a large proportion of its tenancies will be due for renewal in the second three-year rental revision cycle (most of them in September 2013). To date, half of the 67% occupied net lettable area expiring this year have been renewed with higher rentals (more than 10%).
We gather that management is also taking this opportunity to relocate and replace a handful of tenants to enhance the tenant mix. As such, we expect Pavilion REIT’s earnings to be stronger in 2HFY13.
In terms of expansion, the underground diversion work at Fahrenheit Extension and piling work at the USJ mall are currently in progress. Both jobs are targeted to be completed by early and late 2015 respectively.
We understand that the assessment of potential acquisition of Fahrenheit 88 will be deferred to 2014. The shopping mall, located at Jalan Bukit Bintang, Kuala Lumpur, will undertake asset enhancement works at Level 2 to improve the overall tenant mix and rental yield. — Affin IB Research, Aug 2

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This article first appeared in The Edge Financial Daily, on August 05, 2013.