Pavilion REIT’s 4Q20 core net profit of RM40.0m (+25.0% QoQ, -32.3% YoY) brought FY20’s sum to RM116.7m (-52.8% YoY); this was slightly above ours and consensus expectations. Declared dividend of 2.52 sen per unit. The lower YoY showing was mainly due to lower occupancy seen in some non-renewal tenancies as well as lower income from marketing events and advertising, coupled with higher property opex on rebates given to certain tenants. Despite the stronger-than-expected results, we reduce FY21-22 forecasts by 5%-3% to reflect lower top-line contribution due on-going rebates offered to some tenants during MCO as well as current high Covid count. Post earnings adjustments, TP is cut to RM1.42 (from RM1.49), based on targeted yield 4.2% on FY21 DPU. Maintain HOLD.

Slightly above expectations. 4Q20 core net profit of RM40.0m (+25.0% QoQ, -32.3% YoY) brought FY20 sum to RM116.7m (-52.8% YoY). The results were slightly above both ours and consensus expectations, at 107% and 106% of FY20 forecast, respectively. The positive deviation was due to lower-than-expected borrowing costs.

Dividend. Declared dividend of 2.52 sen, going ex on the 11 Feb 2021. This brings FY20 dividend to 4.1 sen (FY19: 8.50 sen).

QoQ. Revenue was up by 12.5% to RM130.8m, mainly due to better occupancy in Pavilion KL and Elite Pavilion Mall. Especially for Pavilion KL, footfall increased in conjunction with Christmas, which led core net profit to rise to RM40.0m (+25.0%)

YoY/YTD. Revenue fell (-10.4% YoY, -23.1% YTD) mainly due to the retail segment (- 10.5% YoY, -23.4% YTD). The disappointment was due to lower occupancy from non renewal of some expired tenancies and lower income from marketing events and advertising. Property opex was higher (+13.9% YoY, +3.1% YTD) due to additional rebates given to some tenants due to MCOs and Covid-19 expenses which includes regular sanitisation, purchase of hygiene equipment, consultancy costs for evaluations made on cooling tower system as well as contribution to Malaysian government. However, this was mitigated by lower electricity costs, and marketing expenses. Also, borrowing costs decreased (-14.4% YoY, -10.7% YTD) due to lower interest rate for its term loan. Sequentially, bottom line showed a decrement (-32.3% YoY, -52.8% YTD).

Occupancy and gearing. Retail occupancy fell marginally to 85.9% (from FY19: 88.8%) while office occupancy remained at 86%. Gearing level increased marginally to 34.7% (FY19: 34.0%).

Outlook. Management is upbeat on vaccine rollout plans that would lead to gradual normalization of higher footfall with longer visitation to malls. However, we remain cautious on the outlook with the ongoing MCO (scheduled to end on 4 Feb) as well as the rising Covid-19 cases in the near-term. We understand Pavilion REIT will continue to provide rebates to some tenants on a case-by-case basis but the magnitude will not be as drastic as in FY20. Also, Pavilion REIT has exposure of 20%-30% of tourists.

Forecast. Although results were slightly above expectations, we lower FY21-FY22 forecasts by 5%-3% to account for the risk of lower revenue with ongoing rebates offered to some tenants during MCO as well as the current high Covid count.

Maintain HOLD, TP: RM1.42. Post earnings adjustments, our TP falls to RM1.42 (from RM1.49). Our TP is based on FY21 DPU on targeted yield of 4.2% which is derived from 2 years historical average yield spread of Pavilion REIT and 10 year MGS. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 29 Jan 2021