Pavilion REIT’s 1H19 realised net profit grew by 2% yoy to RM128.5m on higher rental income from Pavilion KL and Pavilion Elite, but was dampened by lower income from Da Men. In tandem, 1H19 distribution per unit grew by 1.4% yoy to 4.40 sen (from 4.34 sen). Overall, the results were broadly within street and our expectations. Maintain HOLD with a DDM-derived TP of RM1.87. At a 5.2% 2020E yield, PREIT now trades near its 6-year average of 5.4%, which looks fair considering the robust earnings from Pavilion KL and strong investor demand for defensive assets.

1H19 Realised Net Profit Grew by 2% Yoy, Within Expectations

Pavilion REIT’s 1H19 realised net profit grew by 1.8% yoy to RM128.5m on higher net property income from Pavilion KL (+5% to RM163m) and Elite Pavilion Mall (+132% to RM18.9m), partly dampened by lower NPI from Da Men (RM18k in 1H19, from RM4.7m in 1H18) and higher finance cost arising from the additional borrowings taken to finance the Elite Pavilion acquisition. Overall, the results were in line with our and market expectations, making up 47% and 48% of street and our full-year forecasts. We expect earnings to pick up in 2H19 on seasonally stronger revenue and higher occupancy rates at Pavilion KL and Da Men.

Weaker 2Q19 Earnings Due to Seasonality and Refurbishment

Pavilion REIT’s 2Q19 realised net profit fell by 14% qoq to RM59.2m due to lower net property income from Pavilion KL (-11% qoq to RM76.6m), arising from: (i) seasonally weaker revenue; (ii) lower occupancy of 95.6% at end-2Q19 (from 97.8% in end-1Q19) following the refurbishment at Food Republic and a reconfiguration exercise at Level 1; and (iii) higher maintenance & operating expenses including the replacement of the motors for some air-conditioning units.

Da Men Should See Higher Occupancy in 2020

Da Men Mall, the underperforming asset under Pavilion REIT, has secured a few tenants that should improve its occupancy to 85-87% in 2020E (from 65.4% in end-2Q19). New tenants secured are (i) 4 new eateries / restaurants opening in 3Q19; (ii) 2 fast food chains (set to open in 4Q19); (iii) a Karaoke (set to open in 3Q19); and (iv) a cinema opening in 2020. The higher occupancy should improve Da Men’s profitability in 2H19 and 2020.

Source: Affin Hwang Research - 26 Jul 2019