Pavilion REIT’s 4Q19 core net profit of RM59.7m (+0.5% QoQ, -10.4% YoY) brought the FY19 sum to RM247.6m (-2.9% YoY) was within both ours and consensus expectations. Declared dividend of 4.10 sen per unit. A little blip on ther core PATAMI was due to lower occupancy and rental rate in Da Men Mall but was offset by higher rental in Pavilion KL and Pavilion Elite. FY20 will see 20% of NLA expiry and we are sanguine that Pavilion KL will achieve healthy occupancy rate and positive rental reversion due to its strategic location. Furthermore, with conjunction of Visit Malaysia 2020, we believe Pavilion KL will be benefitted due to their prime location. We maintain our forecast and HOLD call with unchanged TP of RM1.81.

Within expectations. 4Q19 core net profit of RM59.7m (+0.5% QoQ, -10.4% YoY) brought the FY19 sum to RM247.6m (-2.9% YoY). The results were within ours but below consensus expectations, accounting for 97% and 94%, respectively.

Dividend. Declared dividend of 4.10 sen, going on ex on the 7th February 2020. This brings FY19 dividend to 8.50 sen (FY18: 8.78 sen) per unit, in line with our expectations.

QoQ. Revenue was slightly up by 1.1% to RM146.0m, leading to core profit of RM59.7m (+0.5%); this was mainly due to higher other revenue (+15%). Furthermore, net property income (NPI) ticked up by 0.2%, due to flattish other operating expenses (+2.7%) incurred during the quarter.

YoY. Gross revenue slightly nudged down by 0.7% against the corresponding 4Q18, mainly due to lower occupancy and rental rate in Da Men Mall. Total operating expenses was higher by 18.7% owing to (i) costs incurred for tenancy lots enhancement at Pavilion KL and Da Men Mall, (ii) marketing and advertising expenses, and (iii) maintenance costs (+75.6%). These have resulted in low er NPI by 9.6% which in turn brought down core PATAMI by 10.4%.

YTD. FY19 revenue showed improvement of 5.5% that was significantly driven by the (i) income from Elite Pavilion Mall (acquired back in April 2018), (ii) higher revenue rent, and (iii) electricity income from Pavilion KL Mall. Nevertheless the improvement was brought down by lower rental income received from Da Men Mall. Total property operating expenses incurred was higher by 16.6% due to the same reasons as above. In turn, bottom-line has decreased to RM247.6m (-2.9%).

Outlook. Despite the challenging environment in general retail mall, we reckon Pavilion KL will continue to enjoy strong footfalls due to prime positioning with strong branding and well managed tenant mix. FY20 will see 20% of NLA expiry and we are sanguine that Pavilion KL will achieve healthy occupancy rate and positive rental reversion due to its strategic location. Furthermore, with conjunction of Visit Malaysia 2020, we believe Pavilion KL will be benefitted due to their prime location as one-stop centre for Malaysian lifestyle providing F&B and entertainment. Nevertheless, we remain cautious on the PREIT’s property expenses that have been rising in the last few quarters and downside risk of negative rental reversion from Da Men Mall.

Forecast. Maintain as the Results Were in Line.

Maintain HOLD, TP: RM1.81. Maintain our HOLD call with unchanged TP of RM1.81 based on targeted yield of 5.3% which is derived from 2 years historical average yield spread of Pavilion REIT and 10 year MGS.

Source: Hong Leong Investment Bank Research - 24 Jan 2020