INVESTMENT HIGHLIGHTS

• FY18 results largely in-line

• CNI for the year grew 10.8%yoy to RM255.1m as revenue increased by 13.3% to RM555m

• 4QFY18 CNI increased by 5.0%yoy to RM66.7m as revenue was up by 13.6%yoy to RM147.1m

• Maintain NEUTRAL with an adjusted TP of RM1.67

FY18 results largely in-line. Pavilion REIT’s FY18 core net income (CNI) of RM255.1m was within ours and consensus’ full year estimates, at 97.1% and 100.5% respectively. A DPU of 4.44 sen was announced, bringing full year DPU to 8.78sen, which was also within expectation.

CNI for the year grew 10.8%yoy as revenue increased by 13.3%. The higher core earnings of RM255.1m and turnover of RM555.0m can be largely attributed to the inclusion of Pavilion Elite into its portfolio since April 2018 and the high occupancy rates and positive rental reversion at Pavilion KL and The Intermark. The full year revenue for Pavilion KL climbed 6.7%yoy to RM440.6m while revenue for The Intermark Mall jumped 18.0%yoy to RM29.2m. On the flipside, revenue from da:mén USJ mall dropped 25.3%yoy to RM29.8m. For the whole of FY18, Pavilion Elite contributed RM42.6m to the REIT’s revenue.

4QFY18 CNI increased by 5.0%yoy to RM66.7m as revenue was up by 13.6%yoy to RM147.1m. Similarly, the stronger on-year performance for the quarter can be attributed to the addition of Pavilion Elite and higher rental income from Pavilion KL as well as Intermark Mall. CNI growth was lower than the turnover mainly due to higher operating costs (+14.1%) and higher borrowing costs (+50.3%), which is attributed to the drawdown to fund the acquisition of Pavilion Elite.

4QFY18 CNI increased 7%qoq while gross revenue climbed 4%. The better sequential quarter can be attributed to the seasonally stronger fourth quarter due to holiday and sales period. The average interest cost creeped up to 4.8% from 4.7% in the previous quarter.

Discussion to participate in ownership of Pavilion Bukit Jalil development terminated. Management explained that the board had decided to halt the discussion that went on for five months as the plan was deemed to be unsuitable for the REIT at this juncture. Recall that both parties entered into a non-disclosure agreement to start due diligence, discussion on method of participation and negotiation of terms last August. However, management does not rule out the possibility that the REIT manager may take over the management of the new mall upon its completion scheduled in end-2020 or 2021.

2HFY19 may be stronger than 1HFY19. We expect FY19 to follow the pattern of FY18 in seeing a softer first half before picking up strongly in the second half. The stronger second half is also backed by potentially higher rental income from Pavilion KL as a big part of its tenancy renewal is likely to be signed in the second half. Positive rental reversion rates are expected for Pavillion KL, Pavilion Elite as well as Intermark Mall. As for da:mén USJ mall, the previous plan to bring in a co-working space operator did not pan out and the mall manager may look to bring in a warehouse bookstore.

Maintain NEUTRAL with an adjusted TP of RM1.67 (previously RM1.60). We made minor adjustments to our FY19F earnings to factor in higher operating expenses arising from higher utilities and maintenance fees due to the higher minimum wage. As a result, our FY19F CNI is reduced to RM289.9m from RM292.2m. On the other hand, we adjusted our required rate of return slightly to 7.6% from 7.9% to better reflect the stable income from Pavilion REIT’s key assets namely Pavilion KL and Intermark Mall. The perpetual growth rate used in our DDM model is maintained at 1.6%. Even though Pavilion REIT has recorded a strong growth in FY18, we think it has been priced in by the market as evidenced by its buoyant 2018 price performance. With that, we maintain our Neutral recommendation. Dividend yield is estimated at 5.1%.

Source: MIDF Research - 30 Jan 2019