Investment Highlights

• We maintain our BUY recommendation on Pavilion REIT (PREIT) with a lower fair value of RM1.75 (from RM1.84) based on an unchanged target yield of 4.5%.

• We cut our FY21F–22F distributable income by 30% and 6% to RM158.5mil and RM238.8mil respectively (from RM226.0mil and RM251.8mil), and introduce our FY23F distributable income projection of RM259.6mil. This is largely to reflect the impact of the extended MCO 2.0 in 1QFY20F, which will continue to exert pressure on the occupancy rate, and likely lead to another round of rental rebates given to tenants, followed by a slower recovery.

• PREIT reported its FY20 revenue and distributable income of RM510.2mil (-13% YoY) and RM125.8mil (-51% YoY) respectively, which was in-line with our forecasts but beat consensus estimates by 14%.

• The weaker revenue was mainly due to lower occupancy rate for malls because of non-renewal of some expired tenancies, as well as lower percentage rent and advertising revenue. Meanwhile, FY20 NPI and distributable income fell by 38% and 51% to RM233.5mil and RM125.8mil respectively, mainly due to rental rebates to non-essential businesses, higher provision for doubtful debts, and higher costs incurred for Covid- 19 related expenses, ie. regular sanitization, purchase of hygiene equipment and tools, consultancy costs, etc.

• For FY20, Pavilion Kuala Lumpur Mall (which contributed up to 92% of PREIT’s total NPI) saw its NPI shrinking by 34%, mainly due to lower occupancy rate, rental rebates given to tenants, as well as higher costs incurred for Covid-19 related expenses as mentioned above.

• The key takeaways from the post-results analysts briefing include:

1. In late October and November, footfall contracted from the 70% (as compared to pre-pandemic level) achieved in 3QFY20 to ~60% and hence sales dropped as Covid-19 cases spiked during the period. However, on a positive note, during the holiday month in December, there was a significant improvement in traffic (to above 80% of prepandemic level) thanks to Christmas and year-end campaigns and promotions.
    
2. Since the beginning of the MCO 2.0, more tenants have been able to obtain the approval from the authority to resume operations. There are currently 196 tenants in operation in PREIT’s malls, out of a total of 530 tenants.
    
3. Parkson (which takes up a total net lettable area of ~40k sq ft) in Da Men mall will be terminating its tenancy in mid-2021. It will be replaced by a bookshop, an electronic shop and a fashion shop, which is expecting to commence operation in 3QFY21, at a slightly better rental rate.

• Moving forward, PREIT is committed to continue to improve its performance and support its tenants by sustaining healthy occupancy levels through proactive lease management; extend its reach to shoppers by leveraging on aggressive marketing strategies, creative initiatives and the use of technology, while adopting prudent capital management; and remain focus on operational recovery while staying safe and vigilant in adherence to Government safety guidelines.

• PREIT proposed a distribution of 1.39 sen per unit for 4QFY20 compared with 2.06 sen per unit YoY. We lower our FY21F–2F distribution projection to 5.2 sen and 7.8 sen respectively, from 7.4 sen and 8.3 sen projected previously.

• PREIT’s debt-to-asset ratio stayed relatively unchanged at 29% (vs. 28% previously), well below the regulatory threshold of 60% (temporarily raised from 50% up to 31 December 2022 by the Securities Commission, being a Covid- 19 relief measure). As such, PREIT does have some headroom to gear up for new acquisitions.

• 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 as well as a yield play, with attractive dividend yields of 3.8% for FY21 and more than 5% for FY21 and beyond amidst a low interest rate environment that is likely to be prolonged.

Source: AmInvest Research - 29 Jan 2021