Pavilion REIT’s FY18 core net profit of RM255.1m (+9.9% YoY) was within both ours and consensus expectations. Declared dividend of 4.44 sen per unit. The lift was backed by the newly acquired Elite Pavilion Mall and improved rental income from both Pavilion KL Mall and Intermark Mall. However the overall improvement was partially offset by higher property operating expenses (at Elite Pavilion Mall and Pavilion KL Mall) and borrowing costs (to acquire Elite Pavilion Mall). We maintain our forecast and HOLD call with unchanged TP of RM1.63.

Within expectations. FY18 revenue of RM555.0m (+13.3% YoY) translated into core net profit of RM255.1m (+9.9% YoY). The results came in within both ours and consensus expectations, accounting for 102% and 101%, respectively.

Dividend. Declared dividend of 4.44 sen, going on ex on the 14th February 2019. This brings FY18 dividend to 8.78 sen (FY17: 8.24 sen) per unit, in line with our expectations.

QoQ/YoY. Revenue for 4Q18 of RM147.1m (+4.0% QoQ, +13.6% YoY) translated to core net profit of RM66.7m (+7.1% QoQ, +2.1% YoY). The boost was mainly thanks to additional contribution from the newly acquired property Elite Pavilion Mall and higher revenue from Pavilion KL Mall and Intermark Mall. However it was slightly offset by the increase in property operating expenses incurred for the new property. The spike in borrowing cost on the other hand was due to the drawdown of additional borrowings for acquisition of Elite Pavilion Mall and working capital purposes. Meanwhile, other trust expenses also increased due to consultancy fees incurred for evaluating the participation in ownership of Pavilion Bukit Jalil.

FY18. Core net profit of RM255.1m showed an increment of 9.9%. The strong performance was primarily supported by the contribution of newly acquired Elite Pavilion Mall back in April 2018, improved rental income from Pavilion KL Mall post repositioning exercise and improved occupancy attained in Intermark Mall. Despite the increase in revenue, it was marginally offset by higher property operating expenses that was incurred for the new Elite Pavilion Mall along with preventive maintenance works at Pavilion KL Mall. Similarly, higher borrowing cost was mainly due to additional debt to facilitate the newly acquired Elite Pavilion Mall as well as working capital purposes. Other than that, other trust expenses too increased which was due to consultancy fees incurred for evaluating the participation of ownership of Pavilion Bukit Jalil.

Outlook. Management remained cautious for 1H19 but will continue to explore improvement to its tenant mix, cost management and shopping experiences to attract shoppers and remain relevant. Hence we foresee Pavilion REIT to exercise some asset enhancement incentives and tenant remixing in FY19 as well as potential injection of Pavilion Bukit Jalil in FY20-21.

Forecast. Maintain as the Results Were in Line.

Maintain HOLD, TP: RM1.63. Maintain our HOLD call with unchanged TP of RM1.63 based on targeted yield of 5.8% which is derived from 2 years historical average yield spread of Pavilion REIT and 10 year MGS.

Source: Hong Leong Investment Bank Research - 30 Jan 2019