Share price: MYR1.45
Target price: MYR1.63 (unchanged)
A Seasonally Weak Quarter
Maintain HOLD. PavREIT’s 1H13 net profit of MYR106m (+11% YoY) was within our and consensus expectations. 1H13 DPU of 3.65sen was also in line (+9% YoY). We maintain our FY13-15 earnings forecasts and DCF-based TP of MYR1.63. PavREIT currently trades at an FY14 net yield of 4.8% vs the large-cap REIT average of 5.1% following the recent selldown on M-REITs due to concerns over rising bond yields.
Earnings on track. 2Q13 realised net profit of MYR52m (+9% YoY, - 4% QoQ), taking 1H13 earnings to MYR106m (+11% YoY) and making up 50-52% of our and consensus full-year estimates. Earnings growth YoY was driven by the re-opening of Fashion Avenue at the Pavilion KL Mall since 3Q12 and better occupancy at Pavilion Tower, whilst the sequential weakness in earnings was due to seasonal factors. PavREIT has declared a 3.65sen DPU for 1H13, which was within our expectations.
Lease renewals in progress. FY13 will be an exciting year for PavREIT as 71% of its NLA is due for renewal (mostly in 3Q13). Thus far it has managed to renew 50% of the expiring leases at double-digit rental growth rates whilst the remainder is in advance negotiations. Meanwhile, there was a slight decline in Pavilion Tower’s office occupancy rate to 94% in 2Q13 from 100% in 1Q13 after the termination of the lease agreement with Aker Engineering S/B (a Canadian oil & gas company). However, management has managed to fill the vacant space and we should see a better occupancy rate at the tower by 4Q13.
Delays in new asset injections. Farenheit88 Mall will likely be injected in 2014 (instead of end-2013 previously), hindered by ongoing enhancement works in the mall while there are delays in the completion of Pavilion Mall extension to end-2015. As such, the acquisition of the extension is only likely to happen in 2016 (2015 previously). However, construction works for the suburban mall in Subang Jaya is on schedule and is targeted for completion in early 2015. We have not incorporated the potential asset acquisition in our earnings forecasts.
Publish date: 02/08/13