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 1QFY19 distributable income of RM72.2mil (+3.5% YoY) came in within expectations at 25.6% and 26.5% of our full-year forecast and the full-year consensus estimates respectively.

• 1QFY19 revenue grew by 14.8% YoY mainly contributed by: (i) revenue from the new property, Elite Pavilion Mall (+ RM14.7mil) where the acquisition was completed in 2QFY18; and (ii) higher revenue from Pavilion Kuala Lumpur Mall (+6.9%). Nonetheless, this was offset by lower revenue from Da Men Mall (-35.1% YoY) mainly from lower occupancy rate.

• Net property income (NPI) improved by 14.1% YoY to RM101.5mil, in line with revenue growth.

• Manager’s management fee rose by 13.7% YoY, mainly due to an increase in the total assets value and net property income.

• Net interest expenses were 46.6% higher as a result from the drawdown of additional borrowings for the acquisition of Elite Pavilion Mall and working capital purposes.

• We keep our FY19–21 numbers unchanged at RM280.9mil, RM292.6mil and RM302.4mil respectively.

• PREIT proposed a distribution of 2.37 sen per unit for 1QFY19 as compared with 2.30 sen per unit YoY. We expect PREIT to distribute 9.2 sen, 9.6 sen and 10.0 sen for FY19–21 respectively, translating into yields of 5.1%, 5.3% and 5.5% respectively.

• Debt-to-asset ratio increased to 34.9% from 26.8% YoY, following the RM580mil acquisition of Elite Pavilion Mall through 100% debt financing.

• Despite the challenging environment, we expect the outlook for retail properties, especially shopping malls, to remain stable 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 17.4x for FY19–21 respectively. Maintain HOLD.

Source: AmInvest Research - 26 Apr 2019