INVESTMENT HIGHLIGHTS

• 1QFY19 results were in-line

• 1QFY19 CNI climbed 5.9%yoy to RM69.2m

• Earnings estimates for FY19F unchanged but FY20F revised

• Maintain NEUTRAL with an adjusted TP of RM1.78 (previously RM1.67)

1QFY19 results were in-line. Pavilion REIT’s 1QFY19 core net income (CNI) of RM69.2m was within ours and consensus’ expectations, making up 24.0% and 25.5% of full year estimates respectively.

1QFY19 CNI climbed 5.9%yoy to RM69.2m as revenue jumped 14.8% to RM150.9m. CNI did not catch up as much as the growth in revenue mainly due to higher property operating costs, particularly higher utilities cost. Moreover, the higher turnover is largely attributed to the inclusion of Pavilion Elite as well as the better performance at Pavilion KL. NPI for Pavilion KL improved by 6.8%yoy to RM86.15m, The Intermark NPI climbed 5.4% to RM4.3m while Pavilion Elite added RM8.67m to its NPI. Meanwhile, the NPI of da:mén USJ mall fell 87%yoy to RM0.39m and Pavilion Office Tower NPI declined 8.8% to RM1.97m.

Earnings estimates for FY19F unchanged but FY20F revised. We maintain our FY19F estimate as the earnings for the quarter is within estimates. However, we have tweaked our FY20F numbers and increased CNI by 1.8% from RM290.6m to RM295.8m due to housekeeping. Following a few quarters of growth, we have also decided to increase the terminal growth of Pavilion REIT to 2.0% from 1.6% previously. This is supported by Pavilion KL’s position as a strategic premium shopping mall that is able to command positive rental reversion consistently.

Maintain NEUTRAL with an adjusted TP of RM1.78 (previously RM1.67). Following the adjustment in our terminal growth, our TP for Pavilion REIT is raised to RM1.78 from RM1.67 previously while the required rate of return is unchanged at 7.6%. While we like Pavilion REIT for the positive rental reversion for Pavilion KL, we think that the upside is limited in the near term (major rental revision had been carried out at Pavilion KL) as the positive growth from the shopping could possibly be offset by the lower on-year performance at da:mén USJ mall and the office tower. Dividend is estimated at 5.4%.

Source: MIDF Research - 26 Apr 2019