Pavilion REIT (PREIT) reported a solid set of results - 1Q18 realised net profit grew by 15% yoy to RM65m on higher contributions from Pavilion KL Mall, driven by an improved occupancy rate and higher turnover rent. The results were broadly within expectations. Maintain HOLD with a lower DDM-derived target price of RM1.54 (from RM1.70). We have raised the cost of equity following management’s decision to call off the placement of new units. PREIT’s 6.0% 2018E distribution yield is 1 SD above its 6-year trading range and looks fair, considering the challenging market conditions for retail MREITs.

Higher 1Q Realised Profit of RM65m (+15% Yoy) Within Expectations

PREIT reported higher 1Q18 realised net profit of RM65m (+15% yoy) on 11% revenue growth, driven by higher contributions from Pavilion KL Mall and Intermark Mall. Pavilion KL Mall recorded higher occupancy of 99% (from 93% in 1Q17) after completing its tenant repositioning exercise. In addition, Pavilion KL also reported higher turnover rent. Elsewhere, Intermark Mall contributed higher revenue of RM7.4m (+22% yoy), driven by improved occupancy while Da Men’s revenue fell by 15% to RM7.9m. Overall, the results were within market and our expectations – 1Q18 realised net profit account for 25-26% of street and our full-year earnings estimates.

Sequentially, Core Earnings Were Marginally Lower

Sequentially, PREIT’s 1Q18 realised net profit fell by 0.4% from a high base – its 4Q17 earnings were lifted by a RM6m one-off revenue from electricityrelated fees at Da Men. Excluding this, results were generally firmer, driven by an increase in turnover rent (Pavilion KL Mall) and higher contributions from Intermark Mall.

Acquisition of Elite Pavilion to be completed by end April / early May

The RM580m acquisition of Elite Pavilion is expected to be completed by end April / early May, a two-month delay from our earlier expectation of endFebruary. Elsewhere, management on 30 March announced the cancellation of its proposed units placement due to low market prices, opting to fully fund the acquisitions via borrowings.

Minor Earnings Tweak

We have revised our FY18-20E EPU forecasts by 1-4%, incorporating: (i) a two-month delay in completion of the Elite Pavilion acquisition; (ii) cancellation of the unit placement; (iii) higher borrowings and finance costs; and (iv) higher turnover rent for Pavilion KL Mall.

Source: Affin Hwang Research - 27 Apr 2018