Pavilion REIT (PREIT) reported a modest set of results - 9M18 realised net profit grew by 13% yoy to RM188m driven by maiden contributions from the Elite Pavilion Mall and higher rental income from Pavilion KL and Intermark mall. However, the results fell slightly below market and our expectations – 9M18 realised net profit accounted for 72% of street and our full-year earnings estimate. We trim our 2018-20E EPU forecasts by 2-3%. Maintain BUY with a revised DDM-derived TP of RM1.81 (from RM1.84). At 6.1% 2019E yield, valuation looks attractive.

9M18 Realised Net Profit Grew 13% to RM188m

PREIT’s 9M18 realised net profit grew by 13% yoy, driven by: (i) maiden revenue contribution from the Elite Pavilion of RM26m (acquisition completed on 27th April 2018); (ii) higher rental contributions from Pavilion KL (+7.0%) and Intermark Mall (+17.1%); and (iii) firmer net property income (NPI) margin of 67.1% (+2.3ppt yoy).

At 72% of street and our full year forecasts, the results are a tad short

Key variance against our forecasts lies in higher than expected finance costs (due to increase in interest rate), higher maintenance cost and lower revenue from the Da Men mall; partly mitigated by better than expected NPI contributions from the Elite Pavilion. Annualising Elite Pavilion’s 3Q18 NPI contribution of RM8.6m, we estimate that the acquisition is yielding a solid return of c.5.9% per annum.

Trimming 2018-20E EPU Forecasts by 2-3%, Lowering TP to RM1.81

We trimmed our 2018-20E EPU forecasts by 2-3%, incorporating a higher effective interest rate of 5.15% (from 5.0%), lower earnings contributions from the Da Men Mall, partly mitigated by higher rental income from Elite Pavilion. In tandem, we have lowered our DDM-derived price target to RM1.81 (from RM1.84).

Maintain BUY on Prime Assets, Attractive Yield

Notwithstanding our earnings cut, we maintain our BUY rating on PREIT. We like PREIT for its prime Pavilion KL Mall, strong branding, competent management team and attractive valuation of 6.1% 2019E distribution yield, +1.5SD above its 7-year average of 5.2%. Key risks to our positive view include weaker than expected average rental growth, higher than expected cost pressure, as well as unexpected hike(s) in interest rate.

Source: Affin Hwang Research - 26 Oct 2018