Pavilion REIT’s FY22 core net profit of RM246.4 (+95.8% YoY) was inline with ours and consensus expectations. The stellar showing was due to expansion in rental income and revenue rent alongside significantly lower rental rebates in FY22. Occupancy rates for its retail properties also saw steady improvement. China’s border reopening is set to further enhance Pavilion KL’s footfall. Management also guided 5-7% positive reversion for Pavilion KL. Raised our FY23/24 earnings forecasts by 3.9%/3.7%. Maintain BUY with higher TP of RM1.44 (from RM1.38).

Inline. 4QFY22 core net profit of RM65.0m (+6.3% QoQ, +20.0% YoY) lifted FY22’s sum to RM246.4m (+95.8% YoY). The core net profit was arrived after excluding fair value gain on investment properties (RM151.4m). This performance is within ours (104%) and consensus expectations (105%).

Dividend. FY22: DPU of 8.37 sen vs 4.41 sen SPLY. (4Q22: 4.29 sen vs 4Q21: 2.58 sen)

QoQ. Revenue increased marginally (+1.5%) to RM145.8m attributed to higher revenue from advertising income. Coupled with lower maintenance costs (-26.1%) which brought down total opex (-8.4%), NPI improved 7.4% and in turn enhanced core bottom line to RM65.0m (+6.3%).

YoY. Top line grew (+17.3%) on the back of higher rental billings and revenue rent following the nation’s transition to endemicity. However, total property opex rose in tandem (+17.6%) due to growing utilities (+30.6%) and maintenance costs (+28.6%). All in, these led to enhanced NPI (+18.2%) and core net profit (+20.0%).

YTD. Revenue rose +16.6% mainly due to the aforementioned reasons on YoY review. However, total property opex declined (-18.4%) due to significantly lower rental rebates given to tenants in FY22. These led to a jump in NPI (+53.9%). As other fixed expenses remained largely stable, core net profit doubled (+95.8%).

Occupancy and gearing. Average occupancy for retail properties expanded to 84% (from 3QFY22: 82%) driven by improvement in occupancy of Pavilion KL Mall to 91.6% (3QFY22: 90.8%), DA MEN Mall to 64.5% (3QFY22: 61.1%) and Elite Pavilion Mall to 92.3% (3QFY22: 89.8%). Meanwhile, office segment (Pavilion Tower) slightly declined to 73% (3QFY22: 74%). Gearing level lowered to 33.8% (3QFY22: 35.1%).

Outlook. We are delighted with PREIT’s stellar showing in FY22 as its performance has returned to pre-pandemic level, if not surpassed. Foreign tourists traditionally accounted for 30% of Pavilion KL’s shopper mix, of which half of them made up of Chinese tourists. Hence, the reopening of China’s border is set to further enhance its retail footfall. Additionally, Pavilion KL registered positive mid-single digit reversion in FY22 while management is expecting to achieve 5-7% positive reversion in FY23. Meanwhile, DA MEN Mall’s occupancy rate is trending up as management undertakes initiatives to strategize its tenancy mix and target to breakeven in 12-18 months.

Forecast. Though FY22 results are inline, we adjust our FY23/24 earnings forecasts by 3.9%/3.7% as we penciled in higher rental reversions assumptions for Pavilion KL and improving occupancy rates for other retail properties.

Maintain BUY, TP: RM1.44. Post earnings adjustment, we maintain BUY with higher TP of RM1.44 (from RM1.38). 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.

Source: Hong Leong Investment Bank Research - 2 Feb 2023