INVESTMENT HIGHLIGHTS

• 1QFY18 results within expectation

• CNI grew 14.3%yoy as revenue jumped 10.6%yoy.

• Unchanged estimates for now

• Maintain Neutral with unchanged TP of RM1.41

1QFY18 results within expectation. Pavilion REIT’s 1QFY18 core net income (CNI) of RM65.4m came in largely within our expectation, making up 26% of our full year estimate. A DPU of 2.2 sen was announced and was in-line with our forecast.

CNI grew 14.3%yoy as revenue jumped 10.6%yoy. The higher gross revenue was driven by higher income contributed by Pavilion KL at +12.4%yoy to RM113m and The Intermark Mall at +21.1%yoy to RM7.4m. da:mén USJ mall, however, saw income decline by -15.5%yoy to RM7.9m. The higher income from Pavilion KL can be largely attributed to the repositioning of its tenants previously. Meanwhile, The Intermark Mall has enjoyed higher occupancy rate. One of the reasons is due to the shutdown of its neighbouring Ampang Park Mall.

Higher revenue more than offset rising operating costs. Pavilion REIT’s higher rental income was more than enough to cover the increase in operating expenses, which rose 6%yoy to RM42.5m. The other income was higher by 25.5%yoy to RM27.1m primarily due to the higher revenue rent from Pavilion KL and the fees received from da:mén USJ mall’s electricity provider to Pavilion REIT for collecting the electricity charges incurred by the da:mén USJ mall tenants.

Unchanged estimates for now. We make no changes to our forecasts at this point as estimates are in line. The acquisition of Pavilion Elite is pending conclusion in the second half and we expect borrowing costs to be higher as Pavilion REIT has earlier on cancelled the private placement to fund the purchase and opted for debt funding instead.

Maintain Neutral with unchanged TP of RM1.41. We believe that Pavilion REIT will be able to deliver earnings growth from Pavilion KL and The Intermark Mall this year but the growth will be partially offset by higher borrowing costs and the decline in income from da:mén USJ. We maintain our earnings assumption and DDM-derived valuation (perpetual growth rate of 1.6% and required rate of return of 7.9%).

Source: MIDF Research - 27 Apr 2018