Pavilion REIT’s 1QFY22 core net profit of RM65.2m (+20.4% QoQ, +108.7% YoY) was above ours and consensus full year estimates. The positive deviation was due to higher-than-expected revenue achieved. No dividends were declared. The overall improvement was mainly due to better revenue as well as lower rental rebates provided. However, it was slightly offset by the increase in utilities and maintenance expenses. We updated our model for FY21 audited accounts, introduce FY24 forecasts and increase FY22-23 earnings by 9%-4% as we factor in lesser rental support going forward. Post earnings adjustments, and after rolling forward of valuation year, our TP increased to RM1.37 (from RM1.31), based on FY23 DPU on targeted yield 5.2%. Maintain HOLD.

Above expectations. 1QFY22 core net profit of RM65.2m (+20.4% QoQ, +108.7% YoY) was above ours and consensus full year expectations, accounting for 32% and 33%, respectively. The positive deviation was due to higher-than-expected revenue.

Dividend. None as dividends are usually payable semi-annually.

QoQ. Revenue improved (+11.7%) to RM138.8m, thanks to higher rental income (+10.5%) and other revenue (+21.2%; mainly from better advertising income). On the other hand, we saw higher property operating expenses (+7.7%) as this was dragged by higher utilities (+17.1%; ending of 10% electricity bill being supported by the government on Dec 2021 and the imposition of electricity tariff surcharge of 3.7 sen per kWh to non-domestic sectors from 1 Feb 2022) as well as higher maintenance expenses (+64.3%; enhanced marketing activities). Thankfully, these were slightly cushioned by lower other operating expenses (-37.4%) due to lesser rebates provided. Overall, these led to net property income (NPI) improvement of +13.7%. Subsequently, borrowings costs remained flat (-0.2%), which in turn, lifted core net profit (+20.4%).

YoY. Top line increase (+10.0%) was driven by improvement in both rental income (+4.6%) and other revenue (+75.1%), in line with more economic sectors and business reopening under Phase 4 of NRP vs. 1QFY21 which faced MCO2.0 (13 Jan – 4 Mar 2021). Separately, property operating expenses was lower (-33.5%) mainly thanks to the fall in other opex (-75.3%) on lesser rent rebates provided to tenants. However, it was slightly offset by higher utilities (+28.3%; government ended 10% electricity bill support in Dec 2021 and imposition of electricity tariff surcharge of 3.7 sen per kWh to non-domestic sector from 1 Feb 2022) and maintenance expenses (+11.0%; resumption of marketing activities and events). These led to NPI improvement (+59.7%) and followed by core net profit of RM65.2m (+108.7%; albeit from a low base).

Occupancy and gearing. Average retail occupancy increased to 81.5% (from FY21: 80.7%), with Pavilion KL Mall continuing stable high occupancy of >90%. Office occupancy fell slightly to 74% (from FY21: 79%). Meanwhile gearing level remained at 35% (FY21: 34.8%).

Outlook. Going forward, we expect lesser rental rebates to be provided, in line with the reopening of the economy and lesser restrictions that may lead to higher footfall with more visitation to malls.

Forecast. We updated our model for FY21 figures, introduce FY24 forecasts, and increase FY22-23 earnings by 9%-4% to factor in lesser rental support moving forward.

Maintain HOLD, TP: RM1.37. Post earnings adjustments, and after rolling forward of valuation year, our TP increased to RM1.37 (from RM1.31). Our TP is based on FY23 DPU on targeted yield of 5.2% which is derived from 2-year historical average yield spread between Pavilion REIT and 10 year MGS. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 29 Apr 2022