Investment Highlights

• We maintain BUY on Pavilion REIT (PREIT) with an unchanged fair value (FV) of RM1.64/share based on our dividend discount model (DDM), which represents a neutral 3-star ESG rating . The FV implies a FY25F distribution yield of 6%, 1 standard deviation above its 5- year median.

• We make no changes to our earnings forecasts as PREIT’s 1HFY24 distributable income of RM166mil was within expectations, accounting for 46% of our full-year forecast and 49% of street’s. As a comparison, 1HFY23 accounted for 45% of FY23 distributable income.

• YoY, PREIT’s 2QFY24 gross revenue soared by 26% YoY while net property income (NPI) increased by 19% YoY. This favorable growth was mainly attributed to recognition of contribution from Pavilion Bukit Jalil (PBJ) vs. maiden contribution in 2QFY23. Meanwhile, PREIT experienced a higher occupancy rate of 87% in 2QFY24 vs. 83% in 2QFY23.

• QoQ, PREIT’s 2QFY24 gross revenue declined by 9% while NPI dropped 12%. This is due to overall lower tenant sales during off-peak season, loss of Elite advertising income and the recommissioning of an LED outdoor screen in July.

• Overall average occupancy rate for all segments remained stable QoQ at 87% in 2QFY24 . The improvement was mainly attributed to an increase in occupancies for Pavilion KL (PKL) and Da Men Mall.

• PKL contribution has remained stable, supported by the new opening of Louis Vuitton retail shop from Starhill Mall drawing more footfall traffic to PKL. Thus, we expect to see slight growth in the upcoming quarter for this segment.

• Nevertheless, we are projecting a stable 2HFY24 with a rental reversion of 5%-8% in PBJ. This projection is based on the anticipated increase in tenant sales driven by the return of foreign tourists in 2H24 for the summer break season.

• Hence, PBJ expects more tenants in 2H2024 with management confident of meeting an occupancy rate of 92% by the end of the year. Thus, PBJ is expected to contribute 24%/26% of PREIT’s FY24F/FY25F NPI.

• Da Men Mall showed a positive increase in occupancy rate in 2QFY24 to 75% from 74% in 1QFY24. This is primarily attributed to better occupancy from short-term leases. Moving forward, management projects an increment in rental rate.

• PREIT will be implementing the nationwide adoption of e-invoicing, which will commence on 1 August 2024. The registration of e-invoicing requires a registration fee from all tenants. However, this has minimal impact on the overall business operation.

• For ESG initiatives, the group has adopted a green energy consumption policy of 20% by installing solar panels and expects to achieve a higher 30%-50% over the next 3 years.

• PREIT declared its gross distribution per unit (DPU) of 4.5 sen in 1HFY24 (+2%, YoY), in line with our assumptions.

• We maintain a favorable outlook on PREIT due to its resilient earnings, primarily underpinned by a prime asset portfolio anchored by PKL and Elite Pavilion Mall - key tourist attractions poised to benefit from the return of international tourists with the 30-day visa-free entry for Chinese tourists to Malaysia. We are optimistic about PBJ’s 2024F earnings as the mall is well positioned for positive rental reversion, backed by improving foot traffic and occupancy rates.

• PREIT offers a compelling FY25F distribution yield of 7% vs. 10-year MGS yield of 3.84%. PREIT’s distribution yield spread against 10-year MGS of 2.7% vs. a pre-pandemic (2017-2019) median of 1% is appealing to yield- seeking investors with its wide distribution spread against 10-year MGS .

Source: AmInvest Research - 18 Jul 2024