KEY INVESTMENT HIGHLIGHTS

• 1QFY20 earnings below expectation

• NPI for all properties came down

• Earnings estimates cut by 41.5%/27.3% for FY20F/FY21F

• Maintain NEUTRAL with a revised TP of RM1.73

1QFY20 earnings below expectation. Pavilion REIT’s 1QFY20 core net income (CNI) of RM34.6m was below our and consensus’ full year estimates at 12.6% and 13.8% respectively. The negative deviation was attributed to lower than expected revenue as well as higher than expected expenses. As expected, no dividend was announced for the quarter.

1QFY20 CNI plunged by 50%yoy to RM34.6m while revenue fell by -22.9%yoy to RM116.4m. This was mainly due to lower rental income as a result of the 14 days rent free period offered to non-essential services tenants during the Movement Control Order (MCO). The REIT manager also recorded lower income from percentage rent and advertising revenue. At the same time, operating expenses increased by +4% or RM1.9m compared to 1Q19 mainly due to the contribution of face masks to the Malaysian Government and higher promotional costs incurred for the Chinese New Year campaigns. 2QFY20 is expected to be more challenging due to the extended MCO period until May.

NPI for all properties came down. Net property income (NPI) for Pavilion KL Mall dropped by -34.5%yoy to RM56.4m, Elite Pavilion Mall NPI was down by -23.0%yoy to RM6.7m, Intermark Mall NPI was erased by -37.2%yoy to RM2.7m and Pavilion Tower declined by -34.0%yoy to RM1.3m. Meanwhile, DA MEN mall saw NPI slipping into the negative territory at –RM2.0m.

Challenging outlook ahead. We expect the challenging operating outlook to persist in the next few months. This is mainly due to the cautious consumer sentiment and a shift in spending habit. The REIT manager is committed in helping eligible tenants to navigate through the challenging business environment with sustainable initiatives. On top of that, savings from electricity bills will be passed on to eligible tenants. The outlook for Pavilion KL Mall’s high-end retailers may be bleak due to consumers’ tightened budget and possibility of cutting back on luxury spending. Entering recovery MCO, inter-state traveling is allowed but international traveling is still controlled. It is reported that circa 30% of the footfall in certain shopping centre in Bukit Bintang is made up of tourists. We believe that the high-end retail segment relies on tourist spending to a certain extent. However, local affluent shoppers may have to shop domestically due to travel restrictions, potentially cushioning the loss of demand from international tourists.

Source: MIDF Research - 12 Jun 2020