Investment Highlights

• We maintain our HOLD recommendation on Pavilion REIT (PREIT) with an unchanged fair value of RM1.68 based on FY19 forward target yield of 5.5%.

• PREIT’s FY18 distributable income of RM266.6mil (+6.8% YoY) came in within expectations at 99.6% and 104% of our full-year forecast and the full-year consensus estimates respectively.

• The stronger performance was mainly contributed by: (i) income from the new property, Elite Pavilion Mall (NPI + RM15.1mil) where the acquisition was completed in 2QFY18; (ii) higher rental income from Pavilion Kuala Lumpur Mall (+6.7%); and (iii) higher occupancy rate at Intermark Mall. Nonetheless, this was offset by lower revenue (-25.5% YoY) mainly from lower occupancy rate at Da Men Mall.

• YTD NPI margin fell to 64.6% from 66.0% YoY mainly due to higher utilities and other operating expenses.

• FY18 manager’s management fee rose by 11.5% YoY, in line with the increase in the total assets value and net property income.

• Net interest expenses were 38.1% higher as a result of the drawdown of additional borrowing for the acquisition of Elite Pavilion Mall.

• We keep our FY19–20 numbers unchanged while introducing FY21 earnings forecast at RM302.4mil

• PREIT proposed a distribution of 2.30 sen per unit for 4QFY18, totalling 8.78 sen for FY18 (+2.8%). As for FY19–20, we expect PREIT to distribute 9.3 sen and 9.6 sen respectively, translating into yields of 5.3% and 5.5% respectively.

• Debt-to-asset ratio climbed to 31% from 23% YoY, following the RM580mil acquisition of Elite Pavilion Mall through 100% debt financing.

• We expect the outlook for retail properties, especially shopping malls, to remain resilient in the short to medium term. The high occupancy rates are also due to strong management and brand names of the REITs; and shopping complexes becoming a one-stop centre for Malaysian lifestyle, providing F&B and entertainment.

• We value PREIT at RM1.68 based on FY19 forward target yield of 5.5%; implying forward PERs of 19.0x, 18.1x and 17.6x for FY19–21 respectively. Maintain HOLD.

Source: AmInvest Research - 30 Jan 2019