INVESTMENT HIGHLIGHTS

• 1HFY18 results slightly exceeded expectation

• CNI for the period grew 13.2% yoy as revenue jumped 11.4%

• Increase earnings estimates by +4.4%/+14.5% for FY18F/FY19F

• Maintain NEUTRAL with adjusted TP of RM1.60 (from RM1.41 previously)

1HFY18 results slightly exceeded expectation. Pavilion REIT’s 1HFY18 core net income (CNI) of RM126.2m was slightly better than our expectation, making up 50% of our full year estimates but within consensus’ expectation at 48% of consensus’. Although the 1H usually account for 48% to 49% of full year earnings, FY18 earnings should have higher weightage in 2H18 in view of new contribution from Pavilion Elite. A DPU of 4.34 sen was announced, which is slightly above our expectation.

CNI grew 13.2% yoy as revenue jumped 11.4% during the period. The higher gross revenue for 1HFY18 was driven by higher income from Pavilion KL at +8.1% yoy to RM218.8m, The Intermark Mall at +17.9% to RM14.5m as well as the addition of Elite Pavilion Mall that amounted to RM11.9m in 1HFY18. da:mén USJ mall’s revenue however fell 18% to RM15.0m. Income from Pavilion KL remains strong following the repositioning of the tenants last year. Meanwhile, The Intermark Mall continued to see higher occupancy qoq from 91% to 92% befitting from the shutdown of Ampang Park Mall.

Qoq, CNI fell 7% to RM60.8m, while gross revenue was by up 3% to RM135m. This is due to lower income from Pavilion KL in 2QFY18 compared to 1QFY18 and also due to the higher borrowing cost from the drawdown of loans to fund the acquisition of Pavilion Elite. Pavilion Elite has started its contribution during the quarter.

Second half should be stronger than the first driven by a much improved consumer sentiment compared to the few months running up to the 14th General Election. The reduction of GST to 0% from June until end-August should also spur consumer spending as consumers may take the opportunity before the implementation of SST to purchase certain luxury or big ticket items. It is also seasonally stronger. That said, we expect higher borrowing cost to partially offset the better performance going forward due to the higher drawdown.

Increase earnings estimates by +4.4%/+14.5% for FY18F/FY19F to RM263m and RM292m. We increase our revenue estimates by +2.3% to RM538m in FY18F and +9.0% to RM606m in FY19F. We believe that Pavilion REIT stands a good chance to renegotiate for favourable rates for Pavilion KL in FY19 following the reconfiguration exercise earlier as 65% of the NLA is up for renewal in FY19. Besides that, 50% of the NLA at The Intermark is also expiring next year. We have imputed higher occupancy rate and rental reversion after taking into consideration of the factors mentioned above.

Maintain NEUTRAL with adjusted TP of RM1.60 (from RM1.41 previously). We believe that Pavilion REIT will be able to deliver earnings growth from Pavilion KL and The Intermark Mall this year and next year. However, the higher earnings may be offset by higher borrowing cost from the drawdown to fund the acquisition of Pavilion Elite. Average interest to-date was 4.6%. Our DDM-derived valuation (perpetual growth rate of 1.6% and required rate of return of 7.9%) is unchanged.

Source: MIDF Research - 27 Jul 2018