INVESTMENT HIGHLIGHTS

• 1HFY19 earnings slightly below expectation

• 1HFY19 CNI was up by 1.8%yoy to RM128.5m

• Earnings estimates for FY19F/FY20F trimmed by 3.4% respectively

• Maintain NEUTRAL with an adjusted TP of RM1.79 (previously RM1.78)

1HFY19 earnings slightly below expectation. Pavilion REIT’s 1HFY19 core net income (CNI) of RM182.5m was slightly below our expectation, making up 44% of full year estimate but was in-line with consensus’ at 47%. The slight deviation can be attributed to higher than expected property expenses. A DPU of 4.4 sen was announced, which is also short of our full year expectation.

1HFY19 CNI was up by 1.8%yoy to RM128.5m as revenue jumped 10.7% to RM295.0m. CNI did not catch up as much as the growth in revenue was mainly due to higher property operating costs, particularly higher utilities (+21%yoy). Maintenance expenses increased by 14%yoy, property taxes by 18.8% and other operating expenses by 15.6% mainly due to the full year impact of the addition of Pavilion Elite. During the period, NPI for Pavilion KL rose 5%yoy to RM162.7m. On the other hand, NPI for da:mén USJ mall fell to RM18,000 from RM4.8m in 1HFY18. The Intermark Mall NPI declined by 2.7% to RM7.3m while Pavilion Elite added RM18.9m to its NPI from RM8.2m as contribution from the asset only started in April 2018.

2QFY19 CNI dipped by 2.6%yoy to RM59.2m as revenue declined -5% to RM144.1m. The lower revenue can be attributed to lower NPI from the Intermark Mall (-11.7%yoy) as well as a small loss at da:mén USJ mall compared to NPI of RM1.8m a year ago. In the conference call, management shared its target to increase occupancy rate at the Subang neighbourhood mall from 65% currently to 85% in about one year’s time. This will be done through roping in a cinema operator and more F&B shops. Sequentially, CNI fell 14% on the back of revenue that dropped by 5% mainly due to lower revenue from Pavilion KL and further increase in electricity adjusted rate for imbalance cost passthrough that took effect from March this year.

Earnings estimates for FY19F/FY20F trimmed by 3.4% respectively. We revised our estimates to factor in higher property expenses especially utilities.

Maintain NEUTRAL with an adjusted TP of RM1.79 (previously RM1.78). We rollover our base year to FY20F, which resulted in a slightly higher TP. The required rate of return is unchanged at 7.6% while terminal growth rate is maintained at 2%. Dividend yield is estimated at 5.0%. We maintain our Neutral stance as we believe that unit price upside is limited in the near term.

Source: MIDF Research - 26 Jul 2019