Investment Highlights

• We maintain our BUY recommendation on Pavilion REIT (PREIT) with a lower fair value of RM1.84 (from RM1.91) as we roll forward our valuation to FY22F while maintaining an unchanged target yield of 4.5%.

• We cut our FY20F–22F distributable income by 22%, 13% and 6% respectively as we factored in higher rental rebates of 30% (vs. 28% previously), and a lower occupancy rate for FY20F. Also, we anticipate a slower recovery in rental rate in FY21F, as we believe the rental rebates will remain in early FY21F for some of the harder hit tenants, taking into account the impact of another round of the CMCO in October in the Klang Valley.

• PREIT reported its 9MFY20 revenue and distributable income of RM286.9mil (-35% YoY) and RM83.5mil (-57.4% YoY) respectively, which are below expectations at 47% and 59% of our and consensus full-year estimates.

• The weaker revenue is mainly due to the rental rebates given to tenants whose businesses that were not of essential services during the MCO and CMCO, lower occupancy due to non-renewal of some expired tenancies and also deferment of rent commencement date for some tenants, as well as lower percentage rent and advertising revenue. As a result, 9MFY20 NPI and distributable income fell by 16% and 57% to RM238.1mil and RM83.5mil respectively.

• For 9MFY20, Pavilion Kuala Lumpur Mall and Elite Pavilion Mall saw revenues shrinking by 27% and 29%, respectively mainly due to a lower occupancy rate. This has dragged their NPI to RM147.8mil and RM12.9mil respectively, decreasing by 38% and 54% from 9MFY19.

• PREIT proposed a distribution of 1.13 sen per unit for 3QFY20 compared with 2.04 sen per unit YoY. We have lowered our FY20F–2F distribution projection to 4.0 sen, 7.4 sen and 8.3 sen respectively, vs. 5.1 sen, 8.6 sen and 8.8 sen projected previously.

• PREIT’s debt-to-asset ratio fell marginally at 29% (from 30% previously), below the regulatory threshold of 60% (temporary increased limit from 50% up to 31 December 2022 as part of the relief measure implemented by the Securities Commission in light of Covid-19). At the current level, we believe PREIT still has some headroom to gear up for future acquisitions. We value PREIT at RM1.84 based on FY22F forward target yield of 4.5%. At its current price, the stock offers a potential upside of 31.4%.

• We believe PREIT’s long-term outlook remains positive given its strategic assets which are located in the heart of the capital in Malaysia, and are poised to benefit from the growth in Malaysia’s economy post-pandemic. We like PREIT as a recovery play stock with reasonable returns, dividend yields of 2.9% for FY20 and more than 5% for FY21 and beyond, as compared to the current low interest rate environment.

Source: AmInvest Research - 23 Oct 2020