Investment Highlights

• We maintain our BUY recommendation on Pavilion REIT (PREIT) with a lower fair value of RM1.91 (from RM1.99) based on an unchanged target yield of 4.5%. We cut our FY20–22 distributable income by 25.1%, 4.0% and 3.4% respectively. We have factored in higher rebates for FY20 (28% from 20%) while lowering our average FY21–FY22 rental rate by 3%.

• PREIT reported its 1HFY20 revenue and distributable income of RM181.0mil (-38.7% YoY) and RM49.1mil (- 63.4% YoY) respectively, which are below expectations at 24% and 27% of our and consensus estimates.

• The weaker revenue is mainly due to the enforcement of the movement control order (MCO) beginning 18 March 2020; further rent rebates from April 2020 to June 2020 given to tenants of non-essential services and supplies; and lower income from car park and advertisements. As a result, 1HFY20 NPI and distributable income fell by 46% and 63.4% to RM104.1mil and RM49.1mil respectively.

• Management indicated a stronger 2HFY20 given the improved situation and it has discontinued its rebates after June 2020. Also, Pavilion KL’s occupancy rate remained strong at 96.4% as of June 2020 vs. previous year’s 95.6% (Exhibit 2).

• PREIT proposed a distribution of 0.4 sen per unit for 2QY20 compared with 2.03 sen per unit YoY. We have lowered our FY20–FY22 distribution to 5.1 sen, 8.6 sen and 8.8 sen respectively.

• PREIT’s 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 RM1.91 based on FY21 forward target yield of 4.5%. At its current price, the stock offers a potential upside of 19.4%, hence we maintain our BUY recommendation. PREIT’s long-term outlook remains positive given the diminishing rate of Covid-19 infections in Malaysia while several stimulus plans by the government provide a greater boost to consumer spending. Furthermore, PREIT’s dividend yields of 3.2% for FY20 and more than 5% for FY21 and beyond, offer attractive returns compared to the current low interest rate environment.

Source: AmInvest Research - 24 Jul 2020