Pavilion REIT’s 2Q20 core net profit of RM10m (-71.1% QoQ, -83.1% YoY) brought 1H20 core net profit of RM44.6m (-65.3% YoY). The results were within ours and consensus expectations. Declared semi-annual dividend of 1.61 sen per unit. The slump performance was mainly due to further rent rebates from April to Jun given to tenants that were not providing essential services, and lower percentage rent and advertising revenue. Management guided that no more rental rebates will be given in 2H as malls are already operating close to 100% and their sales turnover has shown initial encouraging signs of rebound. We maintain our forecast and upgrade our recommendation to HOLD from Sell with an unchanged TP of RM1.45. We reckon the worst is over for PREIT and their earnings should gradually recover in 2H20 coming out of the MCO.

Within expectations. 2Q20 core net profit of RM10m (-71.1% QoQ, -83.1% YoY) brought 1H20 core net profit of RM44.6m (-65.3% YoY). The results were within ours and consensus expectations; at 38% and 24% of full year forecast, respectively. We deem the result to be broadly in line given expectations of gradual recovery in 2H20, coming out of the MCO.

Dividend. Declared semi-annual dividend of 1.61 sen per unit (1H19: 4.40 sen), going on ex on the 6th August 2020.

QoQ/YoY. Revenue tumbled to RM86.7m (-25.5% QoQ, -39.8% YoY), leading to plunge in core net profit of RM10.0m (-71.1% QoQ, -83.1% YoY); this was mainly due to further rent rebates from April to Jun given to tenants that were not providing essential services, and lower percentage rent and advertising revenue.

YTD. Top line fell by 31.1% against the corresponding 1H19 due to lower-than expected rental income arising from rental rebates during the MCO/CMCO/RMCO. Lower income was also recognised from lower percentage rent and advertising revenue during the period. Total operating expenses was lower by 3.2% owing to lower maintenance costs and electricity costs as a result from MCO/CMCO/RMCO. This was however, offset by a higher provision for doubtful debts. Overall, these have resulted in lower NPI by 46.0%, which in turn brought down core net profit by 65.3%.

Outlook. Management guided that no more rental rebates will be given in 2H as malls are already operating close to 100% and their sales turnover has shown initial encouraging signs of a rebound. We expect gradual recovery in 2H as occupancy rates remain strong across its asset backed by its fixed rental rates.

Forecast. Maintain as the Results Were in Line.

Upgrade to HOLD, TP: RM1.45. Upgrade our recommendation to HOLD from Sell with an unchanged TP of RM1.45 based on FY21 forward DPU on targeted yield of 4.5% which is derived from 2 years historical average yield spread of Pavilion REIT and 10 year MGS. We are hopeful that the worst is over for PREIT and their earnings should gradually recover in 2H20 coming out of the MCO.

Source: Hong Leong Investment Bank Research - 30 Jul 2020