Investment Highlights

• We maintain our HOLD recommendation on Pavilion REIT (PREIT) with a lower fair value of RM1.86 (from RM1.93) based on a target yield of 5.0%. We cut our FY20 and FY21 distributable income by 3.5% respectively by imputing higher utilities expenses while introducing FY22 distributable income at RM299.8mil.

• PREIT’s FY19 distributable income of RM258.3mil (- 3.1% YoY) came in within expectations. FY19 revenue grew by 5.5% YoY mainly contributed by: (i) income from Elite Pavilion Mall; (ii) higher revenue of rent and electricity income from Pavilion Kuala Lumpur Mall for supplying electricity to Pavilion Hotel and Pavilion Suites. However, this was offset by lower rental income from Da Men Mall due to lower occupancy and rental rate.

• Despite higher revenue, net property income (NPI) is flattish at RM375.2mil YoY, mainly due to higher utilities costs. Borrowing cost was higher by 9.7% to RM107.3mil due to the drawdown of additional borrowing for the acquisition of Elite Pavilion Mall and for working capital purposes.

• PREIT proposed a distribution of 2.06 sen per unit for 4QY19 compared with 2.30 sen per unit in 4QFY18, bringing the full year distribution unit to 8.5 sen (FY18: 8.78sen). We expect PREIT to distribute 9.3 sen, 9.6 sen and 9.9 sen for FY20–22 respectively, translating into yields of 5.4%, 5.5% and 5.7% respectively.

• Debt-to-asset ratio is maintained at 28% and 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 value PREIT at RM1.86 based on FY20 forward target yield of 5.0%; implying forward PERs of 20.0x, 19.4x and 18.9x for FY20–22 respectively. Maintain HOLD.

Source: AmInvest Research - 24 Jan 2020