Pavilion REIT (PREIT) reported a high realised net profit of RM66m (+18% qoq) in 4Q17, driven by an estimated RM6m of one-off revenue from electricity-related fees. For the FY17, realised net profit slipped by 1% yoy to RM232m on higher O&M costs and lower earnings from Da Men; this is in line with our forecast but 5% short of market expectations. Maintain HOLD.

2017 Realised Net Profit Slipped by 1%, DPU Unchanged at 8.24 Sen

Notwithstanding a higher revenue (+7% yoy), PREIT’s 2017 realised net profit fell by 1% yoy to RM232m due to higher operating and maintenance (O&M) costs at Pavilion KL, higher interest expenses, and a lower earnings contribution from Da Men Mall. Overall, the results were in line within our expectations but 5% below the consensus net profit estimate. PREIT declared its second income distribution of 4.28 sen (4Q16: 4.08 sen), bringing its full-year distribution to 8.24 sen (2016: 8.24 sen).

Stronger 4Q17 Earnings on One-off Revenue, Improved Rental Income

Sequentially, PREIT’s 4Q17 realised net profit increased by 18% qoq to RM65.6m, a record quarter, in part attributable to one-off fees (we estimate at RM6m) received from Da Men’s electricity provider. The provider has been collecting electricity charges incurred by tenants in Da Men Mall since 2Q16. Elsewhere, Pavilion KL reported a 1.5% qoq growth in revenue to RM106m following the completion of its repositioning exercise.

Management Sees Flat NPI From Pavilion KL in 2018

Moving into 2018, management expects the revenue, O&M costs and net profit income (NPI) from Pavilion KL (accounted for 89% of 2017A NPI) to be flat. In view of the recent hike in the Overnight Policy Rate (OPR), weak consumer sentiment and the upcoming general election, management expects minimal rental revision for Pavilion KL in 2018.

Minor Earnings Tweak, Maintain HOLD With An Unchanged TP

We tweaked up our 2018-19E net profit forecasts by 0.4-0.5% after incorporating PREIT’s full-year financial statement. No change to our DDMderived target price of RM1.70. While we continue to like PREIT’s core assets (Pavilion KL and Pavilion Elite), the soft retail mall market conditions and possible rate hike(s) will weigh on investor sentiment. PREIT’s current valuation with a 5.1% 2018E distribution yield is within its historical trading range, which looks fair. Upside risk: a change in market expectations from rising interest rates to a rate cut; downside risk: deterioration in the retail mall market.

Source: Affin Hwang Research - 26 Jan 2018