KEY INVESTMENT HIGHLIGHTS

• FY19 earnings within expectation

• FY19 earnings weighed by high property expenses

• Earnings estimates maintained

• Maintain NEUTRAL with an unchanged TP of RM1.71

FY19 earnings within our expectation. Pavilion REIT’s FY19 core net income of RM247.6m came in within our expectation, making up 95% of our full year estimate. A DPU of 4.1sen was announced, bringing total DPU to 8.5sen in FY19 which is equivalent to gross distribution yield of 4.9%.

FY19 earnings weighed by high property expenses. FY19 core net income eased by 2.9%yoy to RM247.6m despite revenue grew 5.5%yoy, mainly owing to high property expenses. Note that property expenses increased by 12.3%yoy in FY19 due to expenses incurred for Pavilion Elite, higher electricity cost, and costs for repairing air conditioning system. Besides, higher marketing and promotional expenses also weighed on earnings. Overall, topline growth was spurred by Pavilion KL which saw its rental income grew 4.8% in FY19.

Earnings estimates maintained. We make no changes to our earnings forecasts. We expect rental income growth to mainly anchor by higher rental from Pavilion KL which should offset the lower contribution from Da:Men USJ. We also expect property expenses to normalize in FY20.

Maintain NEUTRAL with an unchanged TP of RM1.71. 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 4.8%. We maintain our Neutral stance as we believe that unit price upside is limited in the near-term.

Source: MIDF Research - 24 Jan 2020