Investment Highlights

• We maintain our HOLD recommendation on Pavilion REIT (PREIT) with an unchanged fair value of RM1.93 based on a target yield of 5.0%.

• PREIT registered a 9MFY19 distributable income of RM196.0mil (+1.7% YoY). Despite making up of 70% and 71% of our consensus and full-year forecast, we reckon this to be in line with expectations, as we expect stronger earnings in 4Q.

• 9MFY19 revenue grew by 7.7% YoY mainly contributed by: (i) income from Elite Pavilion Mall that was acquired at the end of April 2018; (ii) higher revenue of rent and electricity income from Pavilion Kuala Lumpur Mall for supplying electricity to Pavilion Hotel and Pavilion Suites. This was offset by lower rental income from Da Men Mall due to lower occupancy and rental rate.

• Net property income (NPI) improved by 3.7% for the same period to RM283.9mil, in line with revenue growth.

• Borrowing cost was higher by RM10.0mil or 15% due to the drawdown of additional borrowing for the acquisition of Elite Pavilion Mall and for working capital purposes.

• PREIT proposed a distribution of 2.04 sen per unit for 3QY19 compared with 2.05 sen per unit in 3QFY18, bringing the year-to-date distribution unit to 6.44 sen. We expect PREIT to distribute 9.2 sen, 9.6 sen and 10.0 sen for FY19–21 respectively, translating into yields of 5.2%, 5.4% and 5.6% respectively.

• Debt-to-asset ratio increased to 29% from 28% YoY due to higher investing activities and working capital purposes, but is still below the regulatory threshold of 50%. At the current level, we believe PREIT still has some headroom to gear up for future acquisitions.

• 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 19.4x, 18.6x and 18.0x for FY19–21 respectively. Maintain HOLD.

Source: AmInvest Research - 25 Oct 2019