Monday, August 5, 2013

PavREIT enhancing tenant mix

By Affin Research
Add (maintain)
Price target: RM1.61

FOR the first half of the financial year 2013 (1H13), the Pavilion REIT (PavREIT) reported a realised net profit (NP) of RM106.2mil (11.2% year-on-year (y-o-y)) on the back of a RM185.9mil of gross revenue (10.5% y-o-y).

Pavilion Mall, which contributed 96.7% to PavREIT’s topline, has seen a pick-up in occupancy rate from 94.6% to 99.5% in June 2013 since the past year following the completion of configuration works at Fashion Avenue.

The mall has also been chalking up higher average rental of RM19 per sq ft (psf) vs about RM17.9 psf in June 2012 despite a relatively flat footfall and retail sales growth.

Pavilion Tower, on the other hand, is currently 94% occupied after one of its largest tenants – Aker Engineering, has vacated one of the five floors that they occupied.

Overall, results were within our expectations, but slightly above consensus estimates.

PavREIT declared an interim income distribution of 3.65sen (versus 3.36 sen in 1H12), which appears to be on track to meet our full year estimates of 7.5sen (5.2% yield).

As expected, 2Q13 is a seasonally weak quarter. Revenue declined by –3.8% quarter-on-quarter to RM91.1mil due to the lower income from percentage rent in relation to the absence of major festive holidays (1Q13 – the Chinese New Year). Earnings before income and taxation margin had however, improved slightly to 64.1% versus 63% in 1Q13, attributed to higher maintenance costs for the scheduled progressive major replacement works in 1Q13. In all, 2Q13 realised NP fell by –4.3% quarter-on-quarter to RM52mil.

Y-o-y, 2Q13 realised NP rise by 8.8% on the back of a 10% increase in revenue and a lower effective interest rate (4.2% versus 4.5%-4.7% in 2Q12).

Interest expenses fell by –6.7% y-o-y due to the conversion of its long-term debts from floating rate to fixed rate effective end of 2012.

2013 is a significant year for PavREIT as a large proportion of their tenancies will be due for renewal in the second three-year rental revision cycle (mostly in September, 2013).

To date, half of the 67% occupied NLA expiring this year have been renewed with higher rentals (over 10%).

We gather that management is also taking this opportunity to relocate and replace a handful of tenants to enhance the mix.

As such, we expect PavREIT earnings to be stronger in 2H13.

In terms of expansion, the underground diversion works at Fahrenheit Extension and pilling works at USJ mall are currently underway.

Both jobs are targeted to be completed by early and late 2015, respectively. Separately, we understand that the assessment of potential acquisition of Fahrenheit 88 will be deferred to 2014 (from 3Q13 – its first renewal period).

Fahrenheit 88 will undertake asset enhancement works at level 2 to improve the overall tenant mix and rental yield.

There is no change to our FY13-15 earnings (E) forecasts.

With a low gearing of 16.7%, PavREIT can leverage up by about RM1.4bil (at the statutory limit of 50%) to fund yield accretive acquisitions.

We maintain “add” with an unchanged dividend discount model-derived target price of RM1.61. PavREIT currently trades at a calendar year 2013 gross yield of 5.2% (versus average Retail REITs yield of 5.3%).

Publish date: 05/08/13

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