Investment Highlights

• We upgrade Pavilion REIT (PREIT) to BUY with a higher fair value of RM1.99 (from RM1.56) as we roll over our valuation to FY21 while reducing our target yield is to 4.5% from 5.0% due to the recent OPR cut by Bank Negara and potentially further interest cuts later this year. Although we make no changes our FY20 numbers, we are raising our FY21 distributable income forecasts by 16% in view of the improving situation of Covid-19 and several stimulus plans by the government to boost the economy. Meanwhile, our observations at Pavilion KL indicate that shopping crowds have been getting larger over the past 2 weeks.

• PREIT reported its 1QFY20 revenue and distributable income of RM102.4mil (-32.2% YoY) and RM34.6mil (-48.8% YoY) respectively. Despite making up only 18% of our fullyear forecast, we deem this to be in line with expectation as we expect stronger earnings in 2HFY20.

• The fall in revenue and distributable income is mainly due to the enforcement of the movement control order (MCO) amidst the Covid-19 pandemic. PREIT granted 14 days of rent-free period from 18 to 31 March 2020 for tenants who are not providing essential products and services.

• Meanwhile, total property operating expenses were 4% higher YoY mainly due to the contribution of face masks to the government in support of Malaysia’s fight against the Covid-19 pandemic and higher costs incurred for Chinese New Year promotional campaigns.

• PREIT proposed a distribution of 1.21 sen per unit for 1QY20 compared with 2.37 sen per unit in 1QFY19. We expect PREIT to distribute 6.9 sen, 8.9 sen and 9.1 sen for FY20–22 respectively, translating into yields of 4.1%, 5.4% and 5.5% respectively.

• Debt-to-asset ratio is maintained at 30% 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.

• We value PREIT at RM1.99 based on FY21 forward target yield of 4.5%. At its current price, the stock offers a potential upside of 20%, hence our upgrade of PREIT to BUY. We view PREIT’s long-term outlook to be positive given the diminishing rate of Covid-19 infections in Malaysia while several stimulus plans by the government provide a greater earnings visibility. Furthermore, PREIT’s dividend yields of 4.1% for FY20 and more than 5% for FY21 and beyond offer attractive returns compared to the current low interest rate environment.

Source: AmInvest Research - 12 Jun 2020