Investment Highlights

• We maintain our BUY recommendation, forecasts and fair value of RM1.50/share for Pavilion REIT (PREIT) based on an FY23F target distribution yield of 5%. We make no ESG-related adjustment to our FV based on our 3-star rating (Exhibit 4).

• PREIT's 9MFY21 distributable income of RM78mil (-6.4% YoY) came in within our and the street’s expectations, accounting for 62% of our FY21F projection and 68% of consensus full-year estimate.

• We consider the results to be in line on expectations of a stronger 4QFY21, premised on higher revenue-sharing rents supported by relaxed lockdown and cross-border restrictions coupled with the year-end holiday and shopping season which could accelerate footfall recovery and retail spending at the malls.

• PREIT’s proposed distribution income contracted by 6.6% YoY to 2.6 sen per unit for 9MFY21 (compared with 2.7 sen per unit in 9MFY20) due to the continuation of movement restrictions. This is as compared to our projection of 4.1 sen for FY21F, followed by 5.9 sen for FY22F and 7.5 sen for FY23F, translating into yields of 3.0%, 4.2% and 5.3% respectively.

• PREIT's 9MFY21 revenue of RM364mil eased by 4% YoY, mainly due to lower occupancy rates of its shopping malls caused by the non-renewal of some expired tenancies and deferment of rental commencement amid the lockdown, as well as lower income from revenue sharing rents, marketing events and advertising.

• This caused the company’s 9MFY21 NPI to shrink by 6.7% YoY to RM154mil, while its distributable income declined by 6.4% to RM78.1mil.

• QoQ, PREIT's 3QFY21 gross rental revenue decreased by 9.2% to RM113mil mainly from lower revenue-sharing rents and income from advertisements.

• However, on a positive note, its NPI and distributable income were flattish at RM48mil and RM22mil respectively, as the lower revenue was offset by a 14.7% QoQ reduction in property operating costs stemming from decreased utilities expenses and rebates given to tenants.

• During the period, PREIT incurred a capex of RM24mil to develop new retail space at Pavilion Mall (glass kiosks outside Fashion Avenue at the end of the Couture precinct) and upgrade a cooling tower at the mall.

• While PREIT’s debt-to-asset ratio inched up slightly to 31% from 29% as at 30 Sep 2020, this remained well below the regulatory threshold of 60% (temporarily raised from 50% until 31 December 2022 by the Securities Commission as a Covid-19 relief measure). At current levels, we believe PREIT still has ample headroom to gear up for new acquisitions. The company guided that it does not rule out potential acquisitions if yield-accretive assets emerge, which will further drive the REIT’s medium-to-long term growth beyond the recovery from Covid-19.

• We believe PREIT’s long-term outlook remains positive given the group’s prominent and strategic assets which are located in the heart of the financial capital in Malaysia, underpinning competitive advantages as compared to its peers. These provide a good platform for new international brands to establish footprints for expansion into the Malaysian market, thus supporting demand for retail space at the malls. We like PREIT as a post-pandemic earnings recovery and distribution yield play which offers more than 4% for FY22F and beyond amidst a low interest rate environment that is likely to be prolonged.

Source: AmInvest Research - 29 Oct 2021