Pavilion REIT’s 9MFY21 core net profit of RM71.7m (-6.5% YoY) was below ours and consensus expectations due to higher-than-expected rental rebates provided. YTD revenue fell (-4.0%) driven by lower occupancy in malls, marketing events and advertising income. We cut our FY21-FY23 earnings forecasts by 15%/1%/1% to factor in slower recovery. Post adjustments, our TP falls to RM1.35 (from RM1.37), based on targeted yield 4.6% on FY22 DPU. Maintain HOLD.

Below expectations. 3QFY21 core net profit of RM20.0m (-2.0% QoQ, -37.5% YoY), brought 9MFY21’s sum to RM71.7m (-6.5% YoY). The results came in below ours and consensus expectations, accounting for 61% and 62%, respectively. The negative deviation was due to higher-than-expected expenses on rental rebates provided to affected tenants.

Dividend. No dividend was declared as it usually payable semi-annually.

QoQ. Gross revenue decreased (-9.2%) to RM113.3m due to lower revenue in retail properties as well as lower income from advertising. Lower property operating expenses (-14.7%) was driven by savings from utilities (-32.8%) and lower rebates for tenants mitigated the decline in top line. Net property income (NPI) remained stable (-0.3%) whereas borrowings costs saw a slight increase (+1.4%). In turn, core net profit fell slightly by 2.0%.

YoY. Top line fell (-4.5%) mainly due to lower revenue rent and advertising income coming from Pavilion KL and Elite Pavilion Mall. Total operating expenses increased (+13.8%) mainly due to additional rebates (+106.0%) for tenants that were not allowed to operate during MCOs and Phase 1 of NRP. However, this was slightly cushioned by utility savings (-28.7%) and lower property upkeep costs (-40.2%). This led to lower NPI (-22.0%). Other trust expense increased (+10.0%) while borrowing costs decreased (- 4.0%) thanks to lower interest rates. As such, bottom line declined by 37.5%.

YTD. Revenue declined to RM364.3m (-4.0%) on the back of lower (i) occupancy in malls (non-renewal of some expired tenancies), (ii) marketing events and (iii) advertising income. Property operating expenses fell slightly (-1.9%) owing to lower utilities (-17.7%) and maintenance (-13.8%), but was slightly offset by higher rebates provided to affected tenants (+9.2%). Overall, these resulted to NPI and core net profit reduction of 6.7% and 6.5% respectively.

Outlook. We remain hopeful for a better recovery in 4Q, following Klang Valley transitions into Phase 4 of NRP (18 Oct). With the lift of interstate restrictions paired with festivities in 4Q, we foresee better footfall and revival of consumer spending. Furthermore, Pavilion REIT initiated loyalty programmes and launched Pavilion KL mobile app to excite and welcome shoppers back into their malls.

Forecast. We cut out FY21-FY23 earnings forecast by 15%/1%/1% to account for the slower than expected recovery with expected higher rental rebates on affected tenants.

Maintain HOLD, TP: RM1.35. Post adjustments, our TP decreases to RM1.35 (from RM1.37), 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 - 29 Oct 2021