Pavilion Reit - Another resilient quarter even in the absence of Tangs HOLD

- We re-affirm our HOLD rating on Pavilion REIT (P-REIT) following the release of the 2QFY12 results. Our fair value is maintained at RM1.33/unit based on a 5% discount to our DCF-value of RM1.40/unit.

- P-REIT reported a 2QFY12 net profit of RM51mil (+6% QoQ), bringing the 1HFY12 total to RM101mil, exceeding our estimate and consensus’, accounting for 54% and 57%, respectively. This is 7% higher compared to the forecast as per prospectus. The underlying increase was contributed by stronger advertising income from Pavilion Mall and income from turnover rent. Separately, carpark income makes up 3% of gross rental income. We understand that management intends to review the rates by year-end. 

- Sequentially, gross rental income fell by 3%, standing at RM83mil, due to 4.5 months of rental gap arising from renovation works at the Fashion Avenue. In line with the top line decline, NPI fell marginally by 0.7%, accounting for RM60mil. Nevertheless, we expect to see top line growth to be back on track once the Fashion Avenue is opened (amounting to 485 tenants), in particularly for FY13F when the full impact will be seen. 

- On the flipside, we continue to be excited about Fashion Avenue (+5% NLA) – with the soft opening this week and the official opening in the first week of September (90% of tenants will move in). This alone would propel rental income by circa 2% in the current year (4 months) and by 4% in FY13F, based on a doubling of rental rates compared to its previous tenant. While the impact may seem minimal, we view this positively because it is bound to bring footfall to a higher level and maximising NLA (converting into 35 speciality stores), which in turn would attract higher rental rates. Bearing in mind, 30% of the Fashion Avenue comprises international brands making their foray into Malaysia, targeting those in their 20s and 30s.

- Rental reversion for Pavilion Mall was healthy at 8%, whereby 60% of leases were renewed this year (19% of NLA). Pavilion Mall’s occupancy (97% of NPI) stood at 95% and will normalise back to 99% once the Fashion Avenue is officially opened. Similarly, occupancy at Pavilion Tower (3% of NPI) is at 88% and will be fully occupied by early September as the vacant space is currently under renovation. 

- For 1HFY12, P-REIT declared a distribution of 3.36 sen/unit amounting to RM100.8 mil, representing a 2.5% yield. The stock has risen 24% since January this year and as such, valuation appears to be pricey in the near term, given that yield has been compressed to 4.7% based on FY12F. 

- We see potential upside from planned asset injections – Fahrenheit 88, USJ mall and Pavilion Extension – in the medium term and more importantly, Pavilion Mall is still at the early stages of its life cycle. Given its status as the second largest REIT in Malaysia and an established brand name within the Golden Triangle, we continue to like P-REIT as it is a good proxy to Malaysia’s prime retail assets and is also well known as the hub for fashion and F&B (both contributes 58% to rental income) in Kuala Lumpur.   

Source: AmeSecurities