• Maintain BUY, with new DDM-derived TP of MYR1.55 from MYR1.48, 19% upside and c.5% yield. Pavilion REIT posted strong earnings in line with the economic recovery, leading to a higher turnover rent portion and advertising income. The reopening of international borders is a plus for the REIT with footfalls in Pavilion Kuala Lumpur still missing the tourist volume shortfall. We expect reversions to be c.3-5% in FY22, with the REIT focusing on improving occupancy.

• Results beat expectations. 1Q22’s core profit of MYR65.2m (+22% QoQ, >100% YoY) beat expectations at 32% of our and consensus estimates. Revenue improved by 10% YoY (12% QoQ), attributed to higher revenue rent and advertising income – a reflection of the improving economic recovery and cessation of rental rebates. The performance during the quarter was similar to pre-pandemic numbers – revenue and core profit were at 92% and 94% of 1Q19’s results. A DPU of 2.21 sen was declared for 1Q22 vs 1.1 sen in 1Q21.

• Recovery underway. With the country officially transitioning to an endemic phase and a relaxation of SOPs, the outlook for the retail industry is positive. Management is targeting a reversion rate of between 3% and 5% in FY22 (FY21: -3%). The focus for the REIT this year will be on improving its occupancy, with Pavilion Kuala Lumpur’s occupancy dropping to c.90% from 96.5% in Dec 2020 after the recurring lockdowns of the past year. We continue to like the mall’s strong positioning, as it stands to benefit from the reopening of international borders.

• Other assets to gradually recover. The losses from Da Men Mall continue to narrow, with the mall reporting a net property loss of MYR0.32m in 1Q22 from MYR1.06m in 4Q21. We expect a steady improvement for the mall with footfalls improving since the opening of Dadi Cinemas in Nov 2021 and its broader strategy to ramp up its positioning as a neighbourhood mall. Intermark Mall should also benefit from the return in office crowds, which should help to boost its occupancy (current occupancy: c.84%)

• Maintain BUY with a higher TP. We increase our FY22F-24F earnings forecast by 7-5% to account for the strong earnings during the quarter. We remain positive on Pavilion Kuala Lumpur, considering its asset quality and prime positioning, while its underperforming assets should slowly recover. Our TP incorporates a 0% ESG premium/discount based on our in-house proprietary methodology.

Source: RHB Research - 29 Apr 2022