Pavilion REIT’s 1QFY21 core net profit of RM31.3m (-21.9% QoQ, -9.7% YoY) was below ours and consensus expectations. The negative deviation was due to lower-than-expected rental income, arising from MCO2.0. No dividend was declared. The disappointment was mainly due to lower occupancy in retail malls due to MCO2.0. We remain cautious as we feel management may further grant rebates to some tenants and international borders are not opening anytime soon. We cut our FY21 earnings by 6% to reflect lower revenue due to MCO2.0. We also introduce FY23 estimates. Maintain HOLD with unchanged TP of RM1.44, based on targeted yield 4.6% on FY22 DPU.

Below expectations. 1QFY21 core net profit of RM31.3m (-21.9% QoQ, -9.7% YoY) was below ours and consensus expectations, accounting for 18% and 17%, respectively. The negative deviation was due to lower-than-expected rental income arising from MCO2.0.

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

QoQ. Revenue decreased 3.5% to RM126.2m, mainly due to lower occupancy in retail malls as well as lower income from events and advertising. Maintenance costs soared (+59.9%) on the back of higher upkeep of machines and equipment. Other operating expenses also increased (+6.9%) due to rebates extended to some tenants. This led to an increase in total operating expenses (+8.1%). As a result, core net profit fell to RM31.3m (-21.9%). In previous quarter (4QFY20), Pavilion REIT performed better given higher footfall in malls in conjunction with Christmas vs. the current quarter where MCO2.0 took effect (13 Jan – 4 Mar 2021), causing footfall to decrease.

YoY. Top line fell (-6.0%) mainly due to the retail segment (-6.2%); the disappointment was driven by lower occupancy from non-renewal of some expired tenancies and lower income from marketing events and advertising. For perspective, MCO1.0 in 1QFY20 was only for 2 weeks in Mar 2020 whereas 1QFY21 MCO2.0 was a longer period (13 Jan – 4 Mar 2021). Maintenance costs (+27.8%) and other operating expenses (+2.1%) increased due to higher upkeep incurred and rebates given to some tenants. However, this was cushioned by lower utilities costs (-32.2%) and marketing expenses. Also, borrowing costs decreased (-14.4%) due to lower interest rate. Sequentially, bottom line showed a declined (-9.7%).

Outlook. Management is confident that the retail industry will recover soon, however we remain cautious on its outlook, given that Pavilion REIT may continue to provide rebates to some tenants on a case-by-case basis, and we are wary on Pavilion REIT’s exposure of 20%-30% tourists that might slow down its recovery.

Forecast. We updated our model for FY20 audited accounts, introduce FY23 forecasts, and cut our FY21 earnings by 6% to account for lower revenue arising from the negative repercussion of MCO. However, we keep FY22 estimates unchanged.

Maintain HOLD, TP: RM1.44. Maintain HOLD with unchanged TP of RM1.44. Our TP is based on FY22 DPU on targeted yield of 4.6% which is derived from 2 years historical average yield spread of Pavilion REIT and 10 year MGS.

Source: Hong Leong Investment Bank Research - 30 Apr 2021