Pavilion REIT’s FY16 net incomes within expectations
KUCHING: Pavilion Real Estate Investment Trust’s (REIT) financial year 2016 (FY16) realised net income (RNI) and interim dividend declared have come in within analysts’ expectations.
In a filing on Bursa Malaysia, Pavilion REIT revealed that the REIT’s income before taxation for year ended December 31, 2016 was RM312.1 million, RM29.8 million or 11 per cent higher compared to preceding year ended December 31, 2015.
According to the research arm of Kenanga Investment Bank Bhd ( Kenanga Research), Pavilion REIT’s FY16 realised net income ( RNI) of RM235.3 million came in within both consensus and its expectations at 96 per cent.
Distribution-wise, an interim dividend of 4.08 sen was declared (which includes a 0.15 sen nontaxable portion), bringing FY16 gross dividend per unit ( GDPU) to 8.24 sen which was well within Kenanga Research’s expectation, making up 98 per cent of its FY16E GDPU of 8.40 sen.
Meanwhile, Affin Hwang Investment Bank Bhd (AffinHwang Capital) observed that Pavilion REIT’s 2016 operations were affected by temporary disruptions.
“On a positive note, management shared that the overall rental reversion for new/renewed tenancies averaged at seven per cent in 2016, vis-à-vis five per cent earlier as at September 2016 in Pavilion KL,” the research firm said.
AffinHwang Capital highlighted that though it was a tough year, where sentiment was undermined by a weaker ringgit and ‘ black swan’ events, Pavilion KL continued to see a decent three to four per cent year on year (y- o-y) growth in retail spending.
The research firm noted that in fact, retail-spending picked up in the fourth quarter of 2016 (4Q16) and is expected to remain robust in 1Q17 owing to festive season.
“Higher tourist arrival – and of late, Indonesian tourists with high spending power – boosted retail spending at Pavilion KL,” it added.
Kenanga Research projected that FY17-18 will see circa 24 to 22 per cent of net lettable area ( NLA) up for expiry on modest single digit reversions.
Pavilion Elite opened in 4Q16 and the research arm expected the acquisition to occur close to mid-FY17.
“Meanwhile, Fahrenheit88 is still on the table, pending the sponsor’s intention to sell, while we believe Pavilion REIT may acquire should cap rates become more favourable – closer to 6.5 per cent,” it said.
Additionally, as it had previously highlighted, Kenanga Research reckoned Pavilion REIT could potentially acquire third party assets from WCT Holdings Bhd ( WCT) as Tan Sri Desmond Lim is now a major shareholder.
“With a low gearing of 0.25-fold currently, Pavilion REIT could gear up by RM850 million before reaching its internal gearing limit of 0.35- fold, or consider a cash call which could raise circa RM550 million assuming a 10 per cent placement,” the research arm said.
Kenanga Research thus maintained FY17E earnings of RM276.6, and introduced FY18E of RM285.6 million.
The research arm expected strong earnings growth in FY17E as FY16 was a major lease expiry year with 69 per cent of NLA up for renewal with midrange single digit reversions, which mostly accrete in FY17E.
As such, FY17-18E net DPU are 8.5 to 8.7 sen which translated to 4.7 to 4.8 per cent net yield, the research arm said.
Overall, Kenanga Research maintained ‘outperform’ on Pavilion REIT with a target price of RM1.89 per share.
As for Affin Hwang, the research firm reaffirmed its ‘buy’ rating on Pavilion REIT at its 12-month dividend discount model-based target price of RM2 per share.
The injection of Pavilion Elite, which is expected to take place within the first half of 2017 (1H17), should be a catalyst to Pavilion REIT, to be funded potentially by an equity-raising exercise.
“Management is also expected to undertake a tenant-improvement exercise at Da: men and Intermark, which will be positive to Pavilion REIT,” it said.