Pavilion REIT’s 9MFY22 core net profit of RM181.4 (+153.1% YoY) was inline with consensus but above our expectations due to stronger-than-expected rental income from retail properties. The stellar performance was also aided by decrease in property opex as rental rebates ceased. Occupancy rates for its retail properties also saw steady improvement. Although we are cautious amidst economic slowdown risk and waning consumer spending, we believe Pavilion KL Mall should anchor its bottom line, banking on the gradual return of foreign tourist. Raised our FY22/23/24 earnings forecasts by 9.4%/8.4%/9.2%, inputting higher rental and occupancy rate assumptions. Maintain HOLD with higher TP of RM1.38 (from RM1.28).

Above expectations. 3QFY22 core net profit of RM61.2m (+2.9% QoQ, +205.7% YoY) lifted 9MFY22’s sum to RM181.4m (+153.1% YoY). This performance is inline with consensus expectations (79%) but above our full-year forecasts (83.7%), attributable to stronger-than-expected rental income from retail properties.

Dividend. None as dividends are usually payable semi-annually. (YTD: 4.08 sen vs SPLY: 1.83)

QoQ. Revenue rose marginally (+1.5%) to RM143.6m, attributable to higher revenue rent. The performance was further buoyed by lower total opex (-8.5%) arising from lower provision for doubtful debts by RM5.0m. These led to an improvement in NPI (+8.6%) and in turn enhanced bottom line to RM61.2m (+11.3%).

YoY/YTD. Top line was up by +26.7% YoY/ +16.4% YTD on the back of positive growth in rental income and contribution from advertising and marketing events following the resumption of business activities across sectors. Total property opex fell by -18.9% YoY/ -25.6% YTD, due to minimal rental rebates given to tenants, albeit offset by (i) higher utility expenses (+91.2% YoY/ 46.0% YTD; arising from the lapse of 10% electricity rebate given by the government and imposition electricity tariff surcharge of 3.7 sen per kWh from 1 Feb 2022) as well as (ii) increased maintenance expense (+32.9% YoY/ +19.1% YTD; resumption of maintenance contracting works alongside higher minimum wage). All in, these led to a surge in core net profit to RM61.2m (+205.7% YoY) and RM181.4m (+153.1% YTD), albeit from a low base.

Occupancy and gearing. Average occupancy for retail properties expanded to 82% (from 2QFY22: 80.5%) with slight improvement in occupancy of Pavilion KL Mall to 91% (2QFY22: 89.7%), Da Men Mall to 61% (2QFY22: 58.8%) and Elite Pavilion Mall to 90% (2QFY22: 86.7%). Meanwhile, office segment (Pavilion Tower) stayed flattish at 74%. Gearing level remained at 35.1% (2QFY22: 34.7%).

Outlook. While we are pleased with the stellar recovery thus far, a degree of caution is warranted as economic slowdown risks loom, coupled with the persistent inflationary pressure, consumer purchasing power is expected to wane and subsequently impact retail spending. Nonetheless, we believe its crown jewel Pavilion KL Mall should continue anchoring its bottom line, especially with the gradual return of foreign tourists. Notably, we also see steady improvement in occupancy of other assets.

Forecast. Raised our FY22/23/24 earnings forecasts by 9.4%/8.4%/9.2% after factoring in higher rental and occupancy rate assumptions.

Maintain HOLD, TP: RM1.38. Post earnings adjustment, we maintain HOLD with higher TP of RM1.38 (from RM1.28). Our TP is based on FY23 DPU on targeted yield of 5.5% 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 - 28 Oct 2022