Pavilion REIT’s 1Q19 core net profit of RM69.2m (+3.9% QoQ, +5.9% YoY) was within both ours and consensus expectations. The increment was driven by better contribution from Pavilion KL and newly acquired Elite Pavilion Mall in April 2018. However the overall improvement was partially offset by higher property operating expenses as well as borrowing costs. We updated our projection based on FY18 audited account which resulted to a revised EPU19-20 of -3% and -5% respectively. Following the dovish tone by major central banks and BNM, we revise our 10-year MGS yield assumption to 3.9% (from 4.1%) and roll forward valuation to mid FY20. We maintain HOLD call with higher TP of RM1.67 (from RM1.63) based on targeted yield of 5.6% (from 5.8%).

Within expectations. 1Q19 gross revenue of RM150.9m (+2.6% QoQ, +14.8% YoY) translated into core net profit of RM69.2m (+3.9% QoQ, +5.9% YoY). The results were within both ours and consensus expectations; 25.4% and 25.5%, respectively.

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

QoQ. Gross revenue increased by 2.6% to RM150.9m (4Q18: RM147.1m), which translated to an increase of core net profit by 3.9% at RM69.2m. The increment was essentially boosted by higher contribution of rental proceeds from Pavilion KL’s tenants after the repositioning exercise. However, this was slightly mitigated by the higher property operating expenses of 7.2% at RM49.4m, incurred for the newly acquired Elite Pavilion Mall in April 2018.

YoY. Gross revenue in 1Q19 saw a 14.8% improvement followed by an increase in core net profit by 5.9% at RM69.2m. The boost was essentially supported by the new revenue contribution from Elite Pavilion Mall (acquired in April 2018) and higher rental income from Pavilion KL post repositioning exercise. This was slightly pulled back by lower rental income from Da Men Mall due to lower occupancy rate achieved. That said, the overall earnings growth was being offset by the increase in operating property expenses and extra borrowing costs; property operating expenses was higher mainly due to the operating costs incurred for Elite Pavilion Mall. The increase in utilities on the other hand was due to the increase in electricity adjusted rate for imbalance cost pass-through (ICPT) that took effect in July 2018 onwards. Higher borrowing costs incurred was mainly due to drawdown of additional borrowings made for acquisition of investment properties and working capital purposes.

Outlook. We believe Pavilion KL enjoys strong footfalls with strong branding and well managed tenant mix. Management remained cautious for FY19 but will continue to explore improvement to its tenant mix, cost management and shopping experiences to attract shoppers and remain relevant.

Forecast. Although results were in line, we updated our projection based on FY18 audited account, which revised our FY19-20 EPU by -3% and -5%, respectively.

Maintain HOLD, TP: RM1.67. Maintain our HOLD call with higher TP of RM1.67 (from RM1.63) based on FY18 targeted yield of 5.6% (from 5.8%). Following the dovish tilt by major central banks (Fed and ECB) as well as BNM, we revise our assumption of the 10-year MGS yield to 3.9% (from 4.1%; currently at 3.8%). We also roll forward valuation to mid-FY20 and introduced FY21 estimates. To note, our valuation model is based on the targeted yield of 2-year historical average yield spread between dividend yield and 10-year MGS yield.

Source: Hong Leong Investment Bank Research - 26 Apr 2019