Investment Highlights

• We maintain our HOLD recommendation on Pavilion REIT (PREIT) with a revised fair value of RM1.93 (from RM1.68) as we rolled over our valuation to FY20 based on a target yield of 5.0%.

• PREIT’s 1HFY19 distributable income of RM134.0mil (+1.7% YoY) came in within expectations at 48% and 49% of our and consensus full-year forecast.

• 1HFY19 revenue grew by 10.7% 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 (-26.4% YoY) mainly from lower occupancy rate.

• Net property income (NPI) improved by 7.4% YoY to RM192.9mil, in line with revenue growth.

• Manager’s management fee rose by 7.6% YoY in 1HFY19, mainly due to an increase in the total assets value and net property income.

• Net interest expenses were 25.2% higher as a result of the drawdown of additional borrowings for the acquisition of Elite Pavilion Mall and working capital purposes.

• PREIT proposed a distribution of 2.03 sen per unit for 1HFY19 as compared with 2.05 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 4.9%, 5.1% and 5.3% respectively.

• Debt-to-asset ratio increased to 34% from 28% 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 keep our FY19–21 distributable income forecasts unchanged at RM280.9mil, RM292.6mil and RM302.4mil respectively.

• We value PREIT at RM1.93 based on FY20 forward target yield of 5.0%; implying forward PERs of 20.4x, 19.6x and 19.0x for FY19–21 respectively. Maintain HOLD

Source: AmInvest Research - 26 Jul 2019