Pavilion REIT (PREIT) reported a strong set of results - 12M18 realised net profit grew by 9.7% yoy to RM255m, driven by maiden contribution from the Elite Pavilion Mall and higher occupancy at Pavilion KL and the Intermark Mall. In tandem, 12M18 DPU grew by 6.6% to 8.78sen. Overall, the results were in line with market and our expectations. Notwithstanding the strong results and positive business outlook, we downgrade our call to a HOLD (from BUY) with a revised TP of RM1.80 (from RM1.81), following its recent price ascend (+12% in 3 months). PREIT’s 2019E yield of 5.2% is within its 6-year average and comparable to peers, looks fair.

2018 Realised Net Profit Grew by 9.7% to RM255m, Within Expectations

PREIT reported a strong set of numbers in 2018 with realised net profit growing 9.7% yoy to RM255m contributed by higher revenue (+13.3% yoy) and firmer NPI margin of 67.5% (+1.6ppt yoy). The higher 2018 NPI (+16.1% yoy) was attributable to: (i) maiden contributions from the Elite Pavilion Mall (RM27.5m); (ii) improvement in Pavilion KL earnings (+9.5% yoy to RM313m on higher occupancy of 98.7%, from 96.1% in 2017); and (iii) higher contributions from Intermark (+45% to RM17.3m). The strong performance for these assets had more than offset lower earnings from the Da Men Mall (-49% yoy to RM8.6m). Overall, the results were within market and our expectations. In tandem, PREIT’s 12M2018 DPU grew by 6.6% to 8.78 sen.

4Q18 Was a Record Quarter

Sequentially, PREIT’s 4Q18 realised net profit increased by 7.1% qoq to RM66.7m on higher contributions across all retail assets due to seasonally stronger retail spending. Similarly, PREIT’s 4Q18 DPU of 2.30 sen is 7.5% higher qoq. Notably, PREIT’s 4Q18 realised net profit was a record high.

2019 likely a firmer year but rental reversions to only kick in in 3Q19

Looking ahead, management expects 2019 to be a firmer year – 1H19E earnings growth should be muted, followed by stronger performance in 2H19E driven by positive rental reversions at Pavilion KL. Management noted that 64% of tenancy (based on NLA) in Pavilion KL is set to expire in 2019, most of which will be up for renewal in 3Q19. Elsewhere, management expect the occupancy at the Intermark Mall to improve to 95-97% (from 94.4% while business operation at Da Men may remain challenging as the group continue to fine tune its tenant mix to attract shoppers.

Source: Affin Hwang Research - 30 Jan 2019