INVESTMENT HIGHLIGHTS

• 9MFY18 results largely in-line

• CNI for the period grew 12.9% yoy as revenue jumped 13.1%

• 3QFY18 CNI leaped 12.4%yoy to RM62.3m as revenue increased by 16.5%yoy RM141.4m

• Maintain NEUTRAL with an unchanged TP of RM1.60

9MFY18 results largely in-line. Pavilion REIT’s 9MFY18 core net income (CNI) of RM188.4m came broadly within ours and consensus’ full year estimates, at 72% of full year forecast. 4Q is seasonally strong due to the year-end sales as well as the holiday season.

CNI for the period grew 12.9% yoy as revenue jumped 13.1%. The higher bottom line of RM188.4m and top line of RM407.9m are mainly due to the contribution from Pavilion Elite, which started since April 2018. The better yoy performance is also attributed to higher rental income from Pavilion Kuala Lumpur after the repositioning exercise as well as higher occupancy rate at the Intermark Mall. Revenue for Pavilion KL grew 7.0% yoy to RM328.5m while The Intermark Mall grew 16.7% to RM21.7m. Revenue from da:mén USJ mall, however, fell 14.7% to RM22.1m. Pavillion Elite contributed RM25.85m to the REIT’s topline to-date.

3QFY18 CNI leaped 12.4%yoy to RM62.3m as revenue increased by 16.5%yoy RM141.4m. Revenue for the quarter was higher due to the contribution of Pavilion Elite, higher rental income from Pavilion KL as well at Intermark Mall. On the other hand, operating costs increased due to the addition of Pavilion Elite while the REIT also incurred higher borrowing costs, which grew 50.5% mainly due to the drawdown to fund the acquisition.

Qoq, 3QFY18 CNI added 2% to RM62.3m, while gross revenue was by up 5% to RM141.4m. The better sequential quarter can be attributed to full quarter contribution from Pavilion Elite as well as higher qoq revenue from all its assets. Meanwhile, the average interest cost creeped up to 4.7% from 4.6% in the previous quarter.

Due diligence on participation in ownership of Pavilion Bukit Jalil development is on-going. Recall that Pavilion REIT has accepted the invitation from Malton Bhd on August 13 to participate in the ownership of Pavilion Bukit Jalil where both parties enter into a non-disclosure agreement to start due diligence, discussion on method of participation and negotiation of terms. The project consists of one block of five-storey retail spaces and two levels of basement carpark.

Maintain NEUTRAL with an unchanged TP of RM1.60. We make no changes to our assumptions as we deem the results was largely in-line as we expect a stronger 4Q. Although Pavilion REIT has recorded a commendable yoy growth, we believe that the growth is largely priced-in at the moment. With that, we maintain our Neutral recommendation. Our DDM-derived valuation (perpetual growth rate of 1.6% and required rate of return of 7.9%) is unchanged. Dividend yield is estimated at 5.1%.

Source: MIDF Research - 26 Oct 2018