Pavilion REIT’s 4Q21 core net profit of RM54.2m (+170.9% QoQ, +35.4% YoY) brought FY21’s sum to RM125.9m (+7.9% YoY); this was above our and consensus expectations. Declared dividend of 2.58 sen per unit. Overall improvement was mainly due to lower property operating expenses (-8.9%; on lower utilities expenses and rental rebates) and lower borrowing costs (-8%). We increase our FY22-23 forecasts by 7%-6% with expectation of lower rebates. Post earnings adjustments, our TP rises to RM1.31 (from RM1.27), based on targeted yield 4.9% on FY22 DPU. Maintain HOLD.

Above expectations. 4Q21 core net profit of RM54.2m (+170.9% QoQ, +35.4% YoY) brought FY21’s sum to RM125.9m (+7.9% YoY). The results were above both our and consensus expectations, forming 125% and 116% of respective full-year forecasts. The positive deviation was due to higher-than-expected revenue.

Dividend. Declared dividend of 2.58 sen, going ex on the 14 Feb 2022. This brings FY21 dividend to 4.4 sen (FY20: 4.1 sen).

QoQ. Revenue was up by 9.7% to RM124.3m, mainly due to better rental income (+2.5%) and other revenue (+147.7%). Improved occupancy was seen in Da Men Mall (from 57.6% to 62.3%). Lower property operating expenses (-36.8%) was mainly driven by lower rental rebates given to tenants (-63.7%) and maintenance costs (-23.6%) but was slightly offset by higher utilities charges (+44.0%). Overall, these led to NPI improvement of +74.2%. Borrowings costs remained flat (-0.4%). In turn, core net profit soared to RM54.2m (+170.9%), albeit from a low base which was impacted by rental rebates due to Phase 1 restrictions in the preceding quarter.

YoY/FY21. Revenue fell (-5.0% YoY, -4.2% YTD) mainly due to the shortfall in retail segment (-5.0% YoY, -4.3% YTD). The disappointment was due to lower occupancy from non-renewal of some expired tenancies and deferment of rent commencement date of some tenants due to various MCOs and NRP Phases. Property operating expenses was lower (-33.3% YoY, -8.9% YTD) due to (i) utilities savings (-10.9% YoY, -15.9% YTD), (ii) lower rental rebates provided to tenants (-57.9% YoY, -6.5% YTD). These led to NPI improvement (+20.8% YoY, +1.3% YTD). Also, borrowing costs decreased (-2.9% YoY, -8.0% YTD) due to lower interest rates. Overall, bottom line improved (+35.4% YoY, +7.9% YTD).

Occupancy and gearing. Retail occupancy fell to 80.7% (from FY20: 85.9%); to note Pavilion KL Mall managed to hold high occupancy of >90% during the year. Office occupancy fell to 79% (from FY20: 86%). Meanwhile gearing level remained at 34.8% (FY20: 34.7%).

Outlook. Management is upbeat on the reopening of the economy as well as the ongoing booster rollout that may lead to higher footfall with longer visitation to malls. We expect rental rebates to continue but at a lower magnitude. Pavilion REIT will continue to focus on sustaining healthy occupancy levels through proactive lease management and leveraging on digital and media presence to engage and draw visitors to its malls.

Forecast. We increase our FY22-23 forecasts by 7%/6% to account for speedier recovery as we expect lower rebates offered to affected tenants moving into FY22.

Maintain HOLD, TP: RM1.31. Post earnings adjustments, our TP improves to RM1.31 (from RM1.27). Our TP is based on FY22 DPU on targeted yield of 4.9% 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 - 28 Jan 2022