KEY INVESTMENT HIGHLIGHTS

• 9MFY19 earnings below expectation

• 9MFY19 CNI dipped by 0.3%yoy to RM187.9m

• 3QFY19 CNI slipped 4.6%yoy to RM59.5m Maintain NEUTRAL with an adjusted TP of RM1.71 (previously RM1.79)

9MFY19 earnings below expectation. Pavilion REIT’s 9MFY19 core net income (CNI) of RM187.9m missed our expectation. It accounted for only 67% of our full year and 70% of street estimates. The negative deviation can be attributed to property expenses that are persistently high.

9MFY19 CNI dipped by 0.3%yoy to RM187.9m even though revenue jumped 7.7% to RM439.4m. Earnings did not grow in tandem with revenue mainly because of property expenses that rose by 16%yoy to RM155.5m due to the inclusion of Pavilion Elite to its portfolio in April 2018 and for higher electricity cost incurred for providing electricity supply to Pavilion Hotel and Pavilion Suites. On top of that it has also incurred costs for repairing air conditioning system, higher marketing and promotional expenses. The REIT manager has expended RM3.8m for toilet refurbishment and food court re-planning at Pavilion KL as well as provisions made for tenancy lots at da:mén USJ mall. In the first nine months, net property income (NPI) for Pavilion KL rose 3%yoy to RM240.3 while Pavilion Elite NPI rose 64.7%yoy to RM28m partly due to a full year impact. On the other hand, da:mén USJ mall NPI fell to RM0.1m from RM6.2m in 9MFY18. The Intermark Mall NPI declined by 11.2% to RM10.3m.

3QFY19 CNI slipped 4.6%yoy to RM59.5m although revenue was up by 2%yoy RM144.4m. This can be attributed to higher property expenses at Pavilion KL during the quarter that jumped by 16%yoy to RM37.1m. Sequentially, revenue and earnings were flat compared to 2QFY19.

Earnings estimates for FY19F/FY20F trimmed by 5.9%/3.7 to RM263.5m and RM275.1m respectively. We now factor in higher property expenses in view of the higher than expected maintenance and other operating expenses. We have also lowered our revenue assumption in line with lower rental income from da:mén USJ mall. Subsequently, we cut our revenue estimates by 1%/0.8% for FY19F/FY20F.

Maintain NEUTRAL with an adjusted TP of RM1.71 (previously RM1.79) in line with the revision to our earnings estimates. However, we maintain our DDM valuation method and the required rate of return at 7.6%. Meanwhile, 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 - 25 Oct 2019