Pavilion REIT’s 1HFY22 core net profit of RM120.2m (+132.7% YoY) was broadly inline with ours and consensus expectations. DPS of 4.08 sen was declared in 1HFY22. The strong recovery in 1HFY22 was mainly due to higher rental income and footfall as well as minimal rental rebates given to tenants. However, it was partially offset by the rise in utilities and maintenance costs. Going forward, performance is seen to remain resilient due to the absence of rental support, reopening of international borders, and robust tenancy pipeline. We maintain our forecasts as results were broadly in line. Our TP of RM1.34 is based on FY23 DPU on targeted yield of 5.2% which is derived from 5-year historical average yield spread between Pavilion REIT and 10 year MGS. Maintain HOLD.

Inline. 2QFY2022 core net profit of RM55.0m (-15.7% QoQ, +169.4% YoY) brought 1HFY22’s sum to RM120.2m (+132.7% YoY). The results were broadly inline with ours and consensus expectations, accounting for 55% and 54%, respectively.

Dividend. Declared DPS of 4.08 sen (semiannual dividend) vs 1.8 sen SPLY.

QoQ. Revenue increased marginally (+2.0%) to RM141.5m, attributable to higher rental income and stronger-than-expected shopper footfall. However, this was offset by higher total operating expenses (+30.4%) mainly due to rise in utilities costs (+15.9%) as imposition of electricity tariff surcharge of 3.7 sen per kWh to non - domestic sectors starting from 1 Feb 2022 (full quarter impact in 2Q) as well as increase in operating expenses (+126.2%) arising from higher provision for doubtful debts. Overall, these led to a decline in core net profit to RM55.0m (-15.7%).

YoY/YTD. Top line increased (+13.4% YoY, +11.7% YTD) due to the growth in rental and advertising income following the resumption of economic activities across sectors; in comparison SPLY was dampened by MCO2.0 and 3.0. Meanwhile, other operating expenses fell (-55.2% YoY, -64.2% YTD) due to minimal rental rebates given to tenants which was, however, partially offset by higher utility expenses due to aforementioned factor (+31.4% YoY, 29.9% YTD) as well as maintenance expense (+14.7% YoY, +12.8% YTD; resumption of marketing activities and events). All in, these led to a jump in core net profit to RM55.0m (+169.4% YoY) and RM120.2m (+132.7% YTD; albeit from a low base).

Occupancy and gearing. Average retail occupancy decreased slightly to 80.5% (from 1QFY22: 81.5%) with decline in occupancy of Pavilion KL Mall to 89.7% (1QFY22: 90.6%), Da Men Mall to 58.8% (1QFY22: 62.0%) and Elite Pavilion Office to 86.7% (1QFY22: 87.8%). Office occupancy remained flat at 74%. Meanwhile, gearing level remained at 34.7% (1QFY22: 35.0%)

Outlook. We gathered from the management that barring unforeseen circumstances, rental rebates will be ceased moving into 2HFY22. In addition, the reopening of international borders will continue to elevate its overall retail footfall, especially its crown jewel Pavilion Kuala Lumpur as international tourists traditionally account for 30% of shopper mix. These coupled with the robust tenancy pipeline across its retail properties, 2HFY22 performance is expected to remain resilient.

Forecast. We maintained our forecasts as results were broadly in line.

Maintain HOLD, TP: RM1.34. Our TP is based on FY23 DPU on targeted yield of 5.2% which is derived from 5-year historical average yield spread between Pavilion REIT and 10 year MGS. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 29 Jul 2022