Pavilion REIT’s 1Q18 core net profit of RM65.3m (+0.0% QoQ, +14.6% YoY) was within both ours and consensus expectations. The boost was driven by improved contribution of rental income from Pavilion KL and Intermark Mall. The overall improvement was partially offset by higher property operating expenses as well as borrowing costs. We retain our forecast and maintain our BUY call with unchanged TP of RM1.51 based on targeted yield of 6.0%.

Within Expectations. 1Q18 gross revenue of RM131.5m (+1.6% QoQ, +10.6% YoY) translated into core net profit of RM65.3m (+0.0% QoQ, +14.6% YoY). The results were within both ours and consensus expectations, accounting for 24.3% and 25.3%, respectively.

Dividend. None as dividend is usually payable semi-annually.

QoQ. Total gross revenue increased by 1.6% to RM131.5m (from RM129.4m in 4Q17), however core net profit remained flat at RM65.3m. The increment was essentially boosted by higher contribution of rental proceeds from Pavilion KL’s tenants after the repositioning exercise, and better occupancy rate in Intermark Mall. However, this was slightly mitigated by the higher property operating expenses by 5.2% at RM42.5m. This was caused by Pavilion KL’s repairs and preventive maintenance works. Additionally, borrowing costs were greater by 2.8% in 1Q18 mainly due to drawdown of additional borrowings for acquisition of investment properties and working capital.

YoY. RM131.5m of gross revenue in 1Q18 was a 10.7% improvement from RM118.9m in 1Q17, which followed by an increase in core net profit by 14.6% at RM65.3m. This was supported by increase in rental income from Pavilion KL and Intermark Mall. Furthermore, other income grew contributed by fees received for the electricity charges incurred by tenants within Da Men Mall. The overall growth was partially being offset by the increase in operating property expenses and extra borrowing costs. Manager’s management fee of RM6.8m was also higher by 6.0% against 1Q17, in line with the increase in total assets value under management.

Outlook. We expect Pavilion REIT to continue to achieve positive rental reversion, supported by growth in tenant sales. Pavilion KL enjoys strong footfalls with strong branding and well managed tenant mix and we expect higher contribution YoY, following the repositioning tenant exercise back in FY17. Besides, inorganic growth from the injection from Pavilion Elite is expected in the near term once the acquisition is completed.

Forecast. Maintain as the results were inline.

Maintain BUY, TP: RM1.51. Maintain our BUY call with unchanged TP of RM1.51 based on FY18 targeted yield of 6.0% which is derived from 2 years historical average yield spread of Pavilion REIT and 10 year MGS.

Source: Hong Leong Investment Bank Research - 27 Apr 2018