Pavilion REIT’s 9M18 core net profit of RM188.4m (+13.1% YoY) was below both ours and consensus expectations mainly due to higher-than-expected operating expenses and borrowing costs. The higher results YoY was backed by the newly acquired Elite Pavilion Mall, better rental income from both Pavilion KL Mall and Intermark Mall. However the overall improvement was partially offset by higher property operating expenses (maintenance works at Pavilion KL Mall) and borrowing costs (to fund Elite Pavilion Mall acquisition). We reduce our FY18-20 earnings forecast by 9.4%, 2.1% and 2.1% respectively to factor in higher operating expenses and borrowings. However, we retain our HOLD call with lower TP of RM1.56 (from RM1.59) based on targeted yield of 6.0%.

Below expectations. 9M18 revenue of RM407.9m (+13.1% YoY) translated into core net profit of RM188.4m (+12.9% YoY). The results came in below both ours and consensus expectations, accounting for 69% and 71%, respectively. This was mainly due to higher than expected operating expenses and borrowings costs.

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

QoQ/YoY. RM141.3m revenue increased (+4.7% QoQ; +16.5% YoY), followed by an increase of core net profit to RM62.2m (+2.4% QoQ; +12.3%). The achievement was mainly due to additional contribution from the newly acquired property Elite Pavilion Mall that was completed at the end of April 2018, higher rental income coming from Pavilion KL Mall post repositioning exercise and improved occupancy rate at Intermark Mall. Similarly, total property operating expenses also grew higher (+6.2% QoQ; 9.2% YoY) due to the operating expenses incurred for the new property. However it was slightly cushioned by lower operating expenses incurred in Pavilion KL Mall. Meanwhile, the spike in borrowing cost (+8.2% QoQ; +50.7% YoY) was due to the drawdown of additional borrowings for acquisition of Elite Pavilion Mall and working capital purposes.

YTD. Revenue for 9M18 of RM407.9m increased by 13.1%. Likewise, core net profit of RM188.4m showed an increment of 12.9% (9M17: RM166.8m). The boost was primarily supported by the contribution of newly acquired Elite Pavilion Mall, improved rental income from Pavilion KL Mall post repositioning exercise and better occupancy attained in Intermark Mall. Meanwhile, higher property operating expenses (+5.9%) was incurred for the new Elite Pavilion Mall along with preventive maintenance works at Pavilion KL Mall. However this was slightly mitigated by lower electricity cost at Da Men Mall. Similarly, additional borrowing costs recorded was mainly due to additional debt to facilitate the newly acquired Elite Pavilion Mall back in April as well as working capital purposes.

Forecast. We cut our FY18-20 earnings forecasts by 9.4%, 2.1% and 2.1% respectively after incorporating higher operating expenses and higher borrowing costs

Maintain HOLD, TP: RM1.56. Maintain our HOLD call with lower TP of RM1.56 from 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 - 26 Oct 2018