Investment Highlights

• We maintain our HOLD recommendation on Pavilion REIT (PREIT) with a revised fair value of RM1.68 based on FY19 forward target yield of 5.5% (previously FY18 @RM1.60).

• PREIT’s 9MFY18 distributable income of RM196.9mil (+9.7% YoY) came in within expectations at 73.5% and 74.9% of our full-year forecast and the full-year consensus estimates respectively.

• The higher earnings were mainly due to: (i) contributions by Elite Pavilion Mall (NPI +RM16.8mil) where the acquisition was completed in 2QFY18; (ii) higher rental income from Pavilion KL Mall (+7%); and (iii) higher occupancy rate at Intermark Mall.

• YTD NPI margin improved to 67.1% from 64.9% the previous year mainly due to the lower maintenance cost incurred for Da Men and Pavilion KL Mall.

• YTD manager’s management fee increased by 10.8%, in line with the increase in the total assets value and net property income. Meanwhile, net interest expenses were 34.8% higher as a result from the drawdown of additional borrowing for the acquisition of Elite Pavilion Mall.

• We maintained our FY18-20 earnings forecast at RM267.7mil, RM280.9mil and RM292.6mil respectively.

• PREIT proposed a distribution of 2.14 sen per unit for 3QFY18, totalling 6.48 sen to date. For FY18-19, we expect PREIT to distribute 8.8 sen and 9.3 sen respectively, translating into yields of 5.6% and 5.9% respectively.

• In August 2018, PREIT was formally invited to participate in the ownership of an ongoing development comprising one block of retail mall with five (5) levels of retail spaces and two (2) levels of basement parking to be provisionally known as Pavilion Bukit Jalil by Malton Bhd. The due diligence is ongoing.

• Debt-to-asset ratio increased to 29% from 21% YoY, following the RM580mil acquisition of Elite Pavilion Mall through 100% debt financing. With the addition of Pavilion Bukit Jalil, we expect its debt-to-asset ratio will rise further to 46% (assuming 100% debt financing of RM1.6bil), nearing the regulatory threshold of 50%. Hence, we do not discount the possibility of equity financing to reduce its gearing.

• We value PREIT at RM1.68 based on FY19 forward target yield of 5.5%; implying forward PERs of 19.0x, 18.1x and 17.4x for FY19-20 respectively. Maintain HOLD.

Source: AmInvest Research - 26 Oct 2018