KEY INVESTMENT HIGHLIGHTS

• 9MFY20 earnings below expectations

• Earnings recovered on sequential basis

• 9MFY20 earnings halved

• Unexciting outlook due to resurgence of Covid-19 cases

• Downgrade to Neutral with a revised TP of RM1.46

9MFY20 earnings below expectations. Pavilion REIT’s 9MFY20 earnings of RM76.6m came in below expectations, making up 63% and 54% of our and consensus full year estimates respectively. The negative deviation could be attributed to the lower-than-expected rental income and the higher-than-expected maintenance expenses in 3QFY20.

Earnings recovered on sequential basis. 3QFY20 earnings improved by 221%qoq to RM32m as earnings in 2QFY20 were dampened by rental rebates during period of Movement Control Order (MCO). The earnings growth was mainly contributed by higher contribution from Pavilion KL and Elite Pavilion. Net property income (NPI) of Pavilion KL was higher at RM54.5m (+47%qoq) while NPI of Elite Pavilion surged by 441%qoq to RM5.3m. Meanwhile, NPI of Intermark Mall was flattish while DA MEN Mall remained in the red in 3QFY20. Nevertheless, earnings growth in 3QFY20 was partly offset by higher maintenance expenses (+43.8%qoq) mainly due to cost incurred for regular sanitization of the malls.

9MFY20 earnings halved. On yearly basis, 3QFY20 earnings was lower at RM32m (-46.1%yoy), bringing cumulative earnings to RM76.6m (-59.2%yoy). The lower earnings were mainly due to rental rebates offered to tenants during MCO and Conditional MCO. Besides, earnings were also affected by lower turnover rent and advertising revenue. Meanwhile, outlook for Pavilion REIT remains unexciting due to resurgence of Covid-19 cases in Malaysia. As such, we expect rental income and shopper traffic to be weaker in 4QFY20. Meanwhile, border of Malaysia remains closed which should continue to dampen shopper traffic of Pavilion KL as ~30% of its footfalls are tourists. Besides, working-from-home order should also lead to lower footfalls of Pavilion KL and Intermark Mall.

Downgrade to NEUTRAL with a revised TP of RM1.46. We revise our FY20/21/22F earnings forecasts by -13.9%/-7.7%/-14.2% as we expect lower rental income and higher maintenance cost going forward. Corresponding to the earnings downward revision, our TP for Pavilion REIT is revised to RM1.46 from RM1.73. Our TP is based on Dividend Discount Model. We downgrade Pavilion REIT to Neutral from Trading Buy as we see the near-term outlook for Pavilion REIT’s malls to be challenging due to resurgence of Covid-19 cases.

Source: MIDF Research - 23 Oct 2020