Pavilion REIT reported a weak set of results – 2019 realised net profit fell by 2.9% yoy to RM248m due to lower earnings from Da Men, Intermark and Pavilion Tower, mitigated by higher contribution from Pavilion KL and Elite Pavilion Mall. In tandem, the DPU fell by 3.1% yoy to 8.50 sen. The results were below market and our expectations due to weaker than expected contribution from Pavilion KL. We cut our 2020-21E earnings forecasts by 6% and lower our DDM-derived TP to RM1.75 (from RM1.85). Maintain HOLD. At 5.0% 2020E yield, PREIT now trades at 0.5 standard deviation below its 6-year average of 5.3%, which looks fair considering resilient earnings from Pavilion KL (85% of group NPI) and strong investor demand for defensive assets.

Weak 2019 Realised Profit of RM248m (-2.9% Yoy), Below Expectations

Pavilion REIT’s 2019 realised net profit fell by 2.9% yoy to RM247.6m due to weaker net property income from Da Men, Pavilion Tower and Intermark, mitigated by higher contributions from the Pavilion KL (Fig 2). In tandem, 2019 DPU slipped by 3.1% to 8.50 sen. The lower profit from Da Men was due to weaker occupancy rates and decline in rental while the decline in Intermark’s contribution was attributable to expiry of the profit guarantee. Overall, the results were below market and our expectations; 2019 net profit came in at 94% of consensus and 96% of our full-year forecasts. The earnings miss was due to lower-than-expected rental and higher operating costs at Pavilion KL and low rental rates at the Da Men.

Sequentially, 4Q19 Earnings Inched Up by 0.5%

Sequentially, Pavilion REIT’s 4Q19 realised net profit grew by 0.5% qoq to RM59.7m on higher contribution from Intermark, Da Men, and Elite Pavilion Mall which more than offset lower NPI from Pavilion KL and Pavilion Tower (Fig 2). Revenue from Pavilion KL has slipped by an unexpected 1.3% qoq while operating costs remained evaluated due to costs incurred for tenancy lots enhancement at Pavilion KL, market expenses incurred for Deepavali and Christmas and upgrading of advertising media.

Management Is Cautious on the 2020 Outlook

Management is cautious on the overall business outlook. Notwithstanding a higher traffic flow at Pavilion KL, management observed that consumer confidence has weakened and expects a flattish year for Pavilion KL. Elsewhere, occupancy at the Da Men mall has improved but the rental has fallen by c.15% yoy. Management is hopeful that the opening of cinema (scheduled to open in October 2020) to lift the mall’s vibrancy and 2021 rental growth.

Source: Affin Hwang Research - 24 Jan 2020