Pavilion REIT’s FY13 results in line with estimates

by **Cals** Tue 21 Jan 2014, 10:45

Business & Markets 2014

Written by Hwang DBS Vickers Research

Tuesday, 21 January 2014 10:21

Pavilion REIT
(Jan 20, RM1.29)
Maintain buy at RM1.32 with a target price of RM1.60: Financial year 2013 ended Dec 31 (FY13) results were in line — net realised income of RM55 million (excluding RM113 million revaluation gain) grew 9% year-on-year (y-o-y) (4% quarter-on-quarter [q-o-q]) underpinned by higher revenue (5% y-o-y; 4% q-o-q) and lower expenses (management fee fell 8% y-o-y; interest expense fell 4%). The higher turnover was mostly due to rental reversions of about 15% at Pavilion KL. Realised income for FY13 was 99% and 100% of our and consensus’ estimates respectively.

Net property income margin improved by 80 basis points to 70.1% compared to the fourth quarter (4Q) of FY12 (69.3%), driven by a spike in Pavilion Tower’s net property income margin to 67.4% (61.2% in 4QFY12) on higher occupancy in 4QFY13 (94%). Gearing has fallen to 16% from 17% as a result of the higher revaluation gains.

There are cost pressures at Pavilion REIT (higher electricity tariff and assessment tax), but it aims to pass that on through higher service and promotional charges. We believe Pavilion REIT will partly absorb the cost impact. However, its fundamentals remain solid with footfall in 2013 growing 5% y-o-y and tenant retail sales going up 5% despite inflationary pressure on consumer wallets.

Pavilion REIT enjoys a visible, sponsor-driven asset pipeline, notably the Pavilion KL extension expected to be completed in 2016 and a retail mall in USJ (called da:men) likely in 2015. We are less optimistic of the injection of fahrenheit88 as the asset needs more time to mature in terms of tenant mix.

Occupancy costs for existing tenancies are also healthy at between 15% and 20%. There will be efforts to enhance the net lettable area at Pavilion KL by 50,000 sq ft to 60,000 sq ft to improve the mall’s couture and beauty sections, which will likely lead to higher rental yields.

The stock offers strong 6% forward distribution yield with robust growth prospects. Earnings downside from rising costs has not yet been factored into our forecast, but assuming full absorption without cost pass through implies a 5% and 7% downside to FY14F and FY15F earnings. — Hwang DBS Vickers Research, Jan 20

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This article first appeared in The Edge Financial Daily, on January 21, 2014.