Investment Highlights

• We maintain our HOLD recommendation on Pavilion REIT (PREIT) with an unchanged fair value of RM1.60 based on a forward target yield of 5.5%.

• PREIT’s 1HFY18 distributable income of RM131.7mil (+9.9% YoY) came in within expectations at 49.2% and 50.2% of our full-year forecast and the full-year consensus estimates respectively.

• The higher earnings were mainly due to: (i) contributions by Elite Pavilion Mall (NPI +RM8.2mil) where the acquisition was completed in 2QFY18; (ii) higher rental income from Pavilion Kuala Lumpur Mall; and (iii) higher occupancy rate at Intermark Mall.

• YTD NPI margin improved to 67.4% from 65.1% in the previous year mainly due to lower maintenance cost incurred for Da Men and Intermark Mall.

• Pavilion Kuala Lumpur Mall has an occupancy rate of 98.7%, contributing 82% of gross revenue and 86.2% net property income.

• Pavilion Elite’s occupancy rate has reached 96.2% in 2QFY18 as compared to around 65% during its opening in November 2016. Overall, occupancy across all assets remained stable (Intermark: 92.2% and Da Men: 79.0%)

• We maintained our FY18-20 earnings forecast at RM267.7mil, RM280.9mil and RM292.6mil respectively.

• PREIT proposed a distribution of 2.05 sen per unit for 2QFY18, totalling 4.34 sen to date. For FY18-19 we expect PREIT to distribute 8.8 sen and 9.3 sen respectively, translating into yields of 5.3% and 5.6% respectively.

• PREIT’s debt-to-asset ratio increased to 28% from 21% YoY, following the RM580mil acquisition of Elite Pavilion Mall through 100% debt financing. Nonetheless, it is still below the regulatory threshold of 50%.

• At the same time, the low gearing level indicates room for future acquisitions, particularly Fahrenheit88 where PREIT has the right of first refusal.

• We value PREIT at RM1.60 based on an unchanged forward FY18 target yield of 5.5%; implying forward PERs of 18.1x, 17.3x and 16.6x for FY19-20 respectively. Maintain HOLD.

Source: AmInvest Research - 27 Jul 2018