Pavilion REIT’s 2Q19 core net profit of RM59.2m (-14.4% QoQ, -2.6% YoY) translated to 1H19 core net profit of RM128.5m (+5.9% YoY). The result was within both ours and consensus expectations. Declared dividend of 4.40 sen per unit. The improvement was supported by the newly acquired Elite, higher revenue rent and electricity income from Pavilion KL. However the overall improvement was partially offset by higher property operating expenses and borrowing costs. We keep our forecast and maintain our HOLD call with unchanged TP of RM1.78 based on targeted yield of 5.4%.

Within expectations. 2Q19 core net profit of RM59.2m (-14.4% QoQ, -2.6% YoY) translated into 1H19 core net profit of RM128.5m (+5.9% YoY). The results were within both ours and consensus expectations; at 48% and 47% of full year forecast, respectively.

Dividend. Declared semi-annual dividend of 4.40 sen per unit (1H18: 4.34 sen), going on ex on the 8th August 2019.

QoQ. Revenue decreased by 4.5% followed by a fall in core net profit by 14.4% to RM59.2m (1Q19:RM60.8m). The decline was mainly due to decrease in revenue rent from Pavilion KL and higher marketing and promotional costs at Da Men Mall.

YoY. Revenue showed 6.7% improvement but saw by a decline in core net profit by 2.6% at RM59.2m. Increase in revenue was supported by increase in rental income from newly acquired Elite Pavilion Mall (Elite) (Apr 2018) and higher revenue rent and electricity income from Pavilion KL for supplying electricity to Pavilion Hotel (PH) and Pavilion Suites (PS). This was slightly offset with a lower rental income from Da Men Mall due to both lower occupancy and rental rate. However higher property operating expenses was incurred due to (i) higher operating cost incurred to acquire Elite, (ii) higher electricity cost incurred to provide electricity supply to PH and PS, (iii) increase in electricity adjusted rate for imbalance cost pass-through (ICPT) which was approved by the Government (July 2018) as well as (iv) higher marketing and promotional expenses incurred at Da Men Mall to attract more shoppers.

YTD. Revenue of RM295.0m increased by 14.8%, likewise, core net profit of RM128.5m showed an increment of 5.9% (1H18: RM126.2m). The boost was primarily supported by the contribution of Elite and higher rental revenue and electricity income from Pavilion KL. This was offset with a lower rental income from Da Men Mall. However higher property operating expenses was incurred from acquiring Elite and higher marketing and promotional expenses incurred at Da Men Mall.

Occupancy and gearing. Occupancy decreased slightly to 90% (1Q19: 91%) whereas gearing remained at 34% (Floating rate 57.2%; Fixed rate 42.8%).

Outlook. We envisage better 2H contribution as we expect Da Men Mall to pick up its occupancy as a new cinema will be opening soon. Also, we expect Pavilion KL to drive in heavier footfalls with the exhibition of the “Marvel Studios: Ten Years of Heroes” ongoing since 28th June 2019- 27th October 2019.

Forecast. Maintain as the Results Were Inline.

Maintain HOLD, TP: RM1.78. Maintain our HOLD call with unchanged TP of RM1.78 based on targeted yield of 5.4% which is derived from 2 years historical average yield spread of Pavilion REIT and 10 year MGS.

Source: Hong Leong Investment Bank Research - 26 Jul 2019