Pavilion's 1H12 core net profit of RM106.2m was in line with our and consensus forecasts, accounting for 50% of our and consensus full-year estimates. There were no surprises at its semi-annual results call.
We maintain our Neutral recommendation on Pavilion REIT. We cut our DDM-based target price to RM1.53, from RM1.59, as we adjusted our risk-free rate assumptions in view of the rising 10-year MGS yields. Given the upward pressure on MGS yields, currently at 4.09%, Pavilion's yields of 5.2-5.4% are rather unattractive.
DPU of 1.79 sen in 2Q
Pavilion declared an income distribution of 3.65 sen for 1H13. This comprises 1.79 sen in 2Q13 and 1.86 sen in 1Q13. Pavilion is on track to meet our full-year estimate of 7.4 sen.
Review of 2Q13 results
Pavilion REIT's revenues in the 2Q13 grew by 10% yoy to RM91.1m, driven mainly by retail rentals from the Fashion Avenue, which started contributions in 3Q12, and Pavilion Tower's full occupancy from 3Q12 onwards. Net property income was higher 7% yoy at RM65.6m as property operating expenses were higher due to planned preventive maintenance work. Qoq revenues and earnings were down due to the higher percentage rent in 1Q13 in relation to higher sales by tenants during the festive season.
67% of NLA up for reversion
For 2013, 67% of Pavilion's net lettable area (NLA) is up for rental reversions. YTD, leases for c.50% of the 67% has been renewed, while another 35% is currently in advanced negotiations. We understand that the 50% reversions were at a rate of 10-15%. We expect to get a clearer picture of Pavilion's rental reversions after everything has been completed, which is expected by Sep.
Publish date: 02/08/13