Pavilion REIT - An even better year ahead after good FY12 BUY

-  We-reaffirm our BUY recommendation on Pavilion REIT (PREIT) with an unchanged fair value of RM1.65/unit, based on our DCF valuation, following the release of FY12 results. 

-  PREIT’s FY12 realised net profit of RM194.6mil (excluding revaluation of fair value gain on investment properties) was within expectations. PREIT declared a 3.51 sen DPU, bringing the totalfor FY12 to 6.87 sen. This translates into a dividend yield of 4.7%. 

-  4Q earnings were RM50.3mil (+3.3% QoQ) on the back of a positive earnings impact seen from Fashion Avenue. Average rental for Pavilion Mall increased by 7.8% to RM18.80psf from RM17.40psf in FY11. However, this was offset by a high maintenance cost due to future replacement or maintenance jobs which were brought forward. Pavilion Tower’s average rental stands at RM5.77psf.

-  Occupancy rate remains healthy at 99.1% and 100% for Pavilion Mall and Pavilion Tower, respectively. No changes to Pavilion Mall’s anchor tenant, where Parkson and Golden Screen Cinema will continue to command 18.1% and 4.5% of NLA, respectively. 

-  To adjust for the results, we are forecasting earnings growth of 7%-10% from FY13F-FY15F and introduce our FY15F earnings. Pavilion Mall is at the early stage of the rental reversion cycle. As such, we believe the mall is able to command at least a 10% rental reversion in the upcoming NLA expiry of nearly 70% (majority in September). Higher rentals achieved arising from enlarged number of speciality stores (+5% NLA) from Fashion Avenue will be fully reflected this year.

-  In line with DBKL’s new directive of an allocation of at least 7% of a shopping mall’s parking space for “single lady driver”, a parking zone for Pavilion Mall has been identified for this purpose. However, due to some uncertainty over this new directive, management will seek clarifications before implementation. In addition, car park rates are in the midst of review given DBKL’s directive of a RM20 per day cap. Parking income constitutes circa 3% of revenue. 

-  Management highlighted uncertainty over the timing of Fahrenheit 88’s injection. Rental reversion is in 4QFY13 and is currently at 100% occupancy. In the upcoming second rental cycle, Fahrenheit 88 will undergo repositioning, particularly for the F&B segment. More importantly, the recent opening of Brands Outlet in August last year has helped increased Fahrenheit 88’s footfall. An Asian Fashion Retail Concept store called Parkamaya was opened in December 2012. Parkamaya could act as a potential crowd puller given the firstof-its-kind shopping experience in Malaysia, underpinned by the inspired fashion of Shibuya, Japan, targeting the younger generation. Elsewhere, the piling stage for da:men mall in USJ is almost complete and piling works for Pavilion Extension have just begun. 

-  PREIT is trading at an FY13F yield of 4.7% based on a 100% distribution ratio, on par with CMMT. We continue to like PREIT’s quality assets and a sizeable pipeline of potential assets that could be injected.  

Source: AmeSecurities