Pavilion REIT’s 1H18 core net profit of RM126.2m (+13.26% YoY) was within both ours and consensus expectations. The improvement was supported by the newly acquired Elite, better rental income from both Pavilion KL and Intermark Mall. However the overall improvement was partially offset by higher property operating expenses and borrowing costs. We retain our forecast and maintain our HOLD call with unchanged TP of RM1.59 based on targeted yield of 6.0%.

Within expectations. 1H18 revenue of RM266.6m (+11.4% YoY) translated into core net profit of RM126.2m (+13.2% YoY). The results were within both ours and consensus expectations, accounting for 47% and 48%, respectively.

Dividend. Declared semi-annual dividend of 4.34 sen per unit (1H17: 3.96 sen), going on ex on the 7th August 2018.

QoQ. Revenue increased by 2.7%, but core net profit decreased by 6.9% to RM60.8m (1Q18:RM65.3m). The decline was mainly due to increase in borrowing cost from additional debt to facilitate the newly acquired Elite Pavilion Mall (Elite) in April 2018. However the decline was partially mitigated by new revenue contribution from Elite.

YoY. RM135.1m of revenue in 2Q18 showed 12.3% improvement (2Q17:RM120.3m) which followed by an increase in core net profit by 11.8% at RM60.8m. This was supported by increase in rental income from Pavilion KL post repositioning exercise, improved occupancy in Intermark Mall and new contribution from Elite. Meanwhile, the increased in property operating expenses was attributed to the new property Elite, but was slightly cushioned by lower maintenance cost incurred in both Da Men Mall and Intermark Mall. Also, higher borrowing cost was incurred essentially due to additional debt drawdown for the acquisition of Elite and working capital purposes.

YTD. Revenue for 1H18 of RM266.6m increased by 11.4% from RM239.2m in corresponding period 1H17. Likewise, core net profit of RM126.2m showed an increment of 13.2% (1H17:RM111.4m). The boost was primarily supported by the contribution of newly acquired Elite, improved rental income from Pavilion KL post repositioning exercise and better occupancy attained in Intermark Mall. Moreover, other income increased due to higher revenue contribution from Pavilion KL. Higher property operating expenses was incurred for the new Elite along with preventive maintenance works at Pavilion KL. However this was slightly mitigated by lower electricity cost at Da Men Mall. Similarly, borrowing costs increased mainly due to additional debt for acquisition of Elite as well as working capital purposes.

Gearing. Gearing increased but remains healthy at 33.7% (1Q18:26.8%) following the acquisition of Elite, which was fully funded by debt.

Outlook. We expect better 2H contribution as we believe Pavilion REIT can continue to achieve positive rental reversion, supported by growth in tenant sales, new contribution from Elite as well as the strong footfalls and branding of Pavilion.

Forecast. Maintain as the Results Were Inline.

Maintain HOLD, TP: RM1.59. Maintain our HOLD call with unchanged TP of RM1.59 based on 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 Jul 2018