KEY INVESTMENT HIGHLIGHTS

• 1HFY20 earnings below expectation

• 2QFY20 CNI plunged by 83.1%yoy to RM10.0m

• 2HFY20 may fare better than 1HFY20

• Earnings estimates for FY20E revised further by -25%

• Upgrade to Trading Buy with an unchanged TP of RM1.73

1HFY20 earnings below expectation. Pavilion REIT’s 1HFY20 core net income (CNI) of RM44.6m was below our and consensus’ full year estimates at 27.7% and 25.4% respectively. The negative deviation can be attributed to higher than expected rental rebates offered to its tenants. An interim dividend of 1.61sen was announced, representing more than 100% of payout ratio. The REIT manager proposed to pay 100% of its distributable income for FY20.

2QFY20 CNI plunged by 83.1%yoy to RM10.0m as revenue fell by -39.8%yoy to RM86.7m. This was mainly due to more rental rebates offered to some of its tenants. On the other hand, operating costs did not come down as much while other operating expenses increased by +20%. Interest income almost halved to RM1.5m. Compared to 1QFY20, revenue declined by -25.5%qoq while core net income (CNI) tumbled by -71.1%qoq.

1HFY20 CNI was down by 24.7%yoy to RM44.6m as revenue slid -41.0%yoy to RM203.1m. During the period, net property income (NPI) for Pavilion KL was down by -42.6%yoy to RM93.4m, Intermark Mall NPI -24.6% to RM5.5m and Pavilion Elite -59.8% to RM7.6m. DA MEN Mall NPI turned negative at –RM5.2m from RM0.02m a year ago.

2HFY20 may fare better than 1HFY20. Looking past the current quarter, which we think may be the trough if the Covid-19 situation in the country remains under control, we opine that the outlook in 2HFY20 should be brighter. Shopper traffic is understood to have recovered to about 60%-70% of pre-MCO level, with the rest being filled up by tourists previously. We think that occupancy rate at Pavilion KL should stabilise at around 95% due to its prime location and market position as premium lifestyle mall with a variety of major international brands. Sooner than expected reopening of international borders should lend some upside to Pavilion KL’s shopper traffic as ~30% of its footfall are tourists.

Earnings estimates for FY20E revised further by -25%. We cut our FY20E forecast further to RM120.8m but we keep our FY21F CNI unchanged as we think that a gradual recovery in income is likely.

Source: MIDF Research - 24 Jul 2020