Pavilion REIT’s 1HFY21 core net profit of RM51.7m (+15.9% YoY) was below ours and consensus expectations. The negative deviation was due to lower-than expected rental income, arising from MCO3.0/ Phase 1 restrictions. Dividend of 1.83 sen per unit was declared. YTD revenue declined (-3.7%) driven by lower occupancy in malls. However, lower opex (-7.7%) and borrowing costs (-12.1%) drove up core net profit (+15.9%). We cut our FY21-23 earnings forecasts by 21%/3%/2% to reflect slower recovery. Post adjustments, our TP falls to RM1.37 (from RM1.40), based on targeted yield 4.6% on FY22 DPU. Maintain HOLD.

Below expectations. 2QFY21 core net profit of RM20.4m (-34.7% QoQ, +104.3% YoY), brought 1HFY21’s sum to RM51.7m (+15.9% YoY). The results came in below ours and consensus expectations, accounting for 34% and 30%, respectively. The negative deviation was due to lower-than-expected rental income arising from MCO3.0/ Phase 1 restrictions.

Dividend. Declared semi-annual dividend of 1.83 sen per unit (1HFY20: 1.61 sen), going on ex on 19 Aug 2021.

QoQ. Revenue was stable (-1.1%) at RM124.8m. Property operating expenses increased (+14.5%) mainly driven by higher other operating expenses (+24.6%) due to additional rebates for tenants that were not providing essential services and supplies during the quarter. This followed by lower net property income (NPI) of RM47.6m (- 19.1%). On top of these, lower interest income (-4.2%) and higher other trust expenses (+11.8%) led to the plunge in core net profit of RM20.4m (-34.7%).

YoY. Top line remain flattish (-1.3%) while operating expenses reduced (-11.6%) on the back of lower maintenance (-7.7%), marketing and other operating expenses (-19.3%). Thus, higher NPI was attained (+21.9%). Borrowing costs decreased (-9.5%) due to lower interest rates. Sequentially, bottom line improved (+104.3%, low base effect).

YTD. Revenue declined to RM251.0m (-3.7%) mainly due to lower (i) occupancy rate for shopping malls (because of non-renewal of some expired tenancies), (ii) marketing events and (iii) advertising income. Total operating expenses was lower by 7.7% owing to lower utilities (-12.9%) and other operating expenses (-11.0%) with lower marketing and promotional expenses. Overall, these resulted to NPI improvement (+2.2%) while lower borrowing costs (-12.1%) from falling interest rates drove up core net profit to RM51.7m (+15.9%).

Occupancy and gearing. With 5 properties, the overall occupancy rate decreased to 82.7% (1QFY21: 83.1%). That said, Pavilion KL Mall’s occupancy remained strong above 90%. As for gearing level, it maintained at 34.8% (FY20: 34.7%), with majority of its total borrowings being charged a floating interest rate (57.5%).

Outlook. We remain cautious on its outlook, as we expect prolonged rental assistance to selected tenants. We are hopeful for better recovery in 4Q, as we take some cues from the NRP with Phase 3 (estimated in Sep-Oct) will be seeing a reopening recovery for malls, given loosening of social restrictions such as dine-ins and leisure shopping possibly allowed. This consumerism reopening revival should see revenge spending given pent up demand. .

Forecast. We cut out FY21-FY23 earnings forecast by 21%/3%/2% to account for slower than expected recovery with expected prolonged rental assistance.

Maintain HOLD, TP: RM1.37. Post adjustments, our TP decreases to RM1.37 (from RM1.40), 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. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 6 Aug 2021