• Pavilion REIT’s (PREIT) earnings are expected to pick up from 2H21 onwards as the country progresses with its inoculation programme
• We urge investors to look past the short-term earnings weakness in 2021 and to take a longer-term outlook on earnings
• Given the pull-back in share price and positive long-term earnings outlook, we maintain our BUY rating on PREIT and trim our TP to RM1.52 as we tweak earnings slightly to reflect lower occupancy in the malls

Remain Positive on Medium to Longer-term Earnings Outlook

We remain positive on PREIT’s medium to long-term earnings outlook as rental assistance extended to tenants is expected to taper off as Malaysia progresses further with its vaccination programme. Despite the surge in Covid-19 cases in Malaysia which led to the re-implementation of MCO 3.0 in 6 districts in Selangor and Kuala Lumpur for a period of two weeks, we advise investors to look past the short term earnings volatility, as we expect a faster economic recovery from 2H21 on the expectation that the country’s vaccination program will gain momentum from May 2021 driven by the introduction of AstraZeneca’s vaccine and the CoronaVac (Sinovac’s vaccine) from Pharmaniaga’s manufacturing facility.

Occupancy to Improve in Time

PREIT’s malls have recorded lower occupancy due to some tenancy non-renewals since 2020 due to the challenging business environment. Moving forward, we opine that PREIT will be able to secure new tenants for the vacant lots, given its malls’ prime locations and branding. On a blended basis, management has guided that expected rental reversions for 2021 will be flat to positive low digits (compared to a flat rental reversion in 2020).

Maintain BUY With a Lower DDM-derived Target Price of RM1.52

We reiterate our BUY call on PREIT with a lower DDM-derived target price of RM1.52 (from RM1.53) as we tweak down our 2021-2023E assumptions by 1-3% to reflect the lower occupancy rates in the malls. We continue to like PREIT for its prime Pavilion KL mall and competent management. Given the pullback in share price, we believe it is an opportune time to collect a quality REITs with a positive earnings recovery outlook. At a 5.8% 2022E dividend yield, valuation remains attractive. Downside risks to our BUY call are a decline in consumer spending, prolonged need for rental assistance, further deterioration of occupancy and interest rate increase.

Source: Affin Hwang Research - 10 May 2021