• Maintain BUY, with DDM-derived MYR1.50 TP from MYR1.55, 13% upside and 6% yield. Pavilion REIT reported earnings that were in line with consensus as it benefited from the broader economic recovery and elevated retail sales from the Aidil Fitri festivities. While still below pre-pandemic levels, footfall in Pavilion Kuala Lumpur should continue to improve with tourists slowly returning since the opening of international borders. We expect reversions to be c.3-5% in FY22F on the back of the improved retail outlook.

• Results in line with expectations. 2Q22 core profit of MYR55m (-16% QoQ, +169% YoY) brought 1H22 earnings to MYR120m (+132% YoY), which is at 54% of our and consensus estimates. Although revenue grew by 2% QoQ to MYR142m, net property income fell by 11.6% QoQ because of higher operating expenses for the recommencement of regular upkeeps in the quarter, as well as higher utility costs. A DPU of 1.87 sen was declared for the quarter (1Q22: 2.21 sen). We think the recovery is well underway, with revenue and core profit similar to pre-pandemic levels, at 95% and 94% of 2Q19 numbers.

• Returning to normal. While 2Q is typically a seasonally slower quarter, the strong performance was attributed to the Aidil Fitri festivities that boosted retail sales, as well as higher spending power from the Employees Provident Fund (EPF) savings withdrawal. For Pavilion Kuala Lumpur, the occupancy rate dropped marginally from 90.6% in March to 89.7% in June – however, management guided that it should only be a temporary drop with tenants being repositioned in the mall. Reversions in 1H22 were positive around 2-3%, and the REIT are targeting c.92% occupancy in 2H22.

• Da Men recovery to take time. Da Men Mall reported a net property loss of MYR2.91m in 2Q22 (vs -MYR0.32m in 1Q22). While the mall should still remain in the red this year, management is hopeful that it can return to black next year as footfall returns. With Dadi Cinema open, the REIT will use it as an anchor to pull in more traffic. The occupancy rate dropped slightly to 58.8% from 62% in March, but management guided that it has signed up 72% occupancy by end-FY22 – a level last achieved in Sep 2020.

• Pavilion Bukit Jalil. The REIT recently announced that discussions to purchase Pavilion Bukit Jalil mall are still ongoing. We understand that the occupancy rate at the mall is at 60%, with 75% occupancy in terms of signed tenancies. No timeline for the acquisition was guided by management.

• Maintain BUY. We adjust our earnings by -2 to 8%. We remain positive on Pavilion Kuala Lumpur, considering its strong asset quality and prime positioning. Our TP incorporates a 0% ESG premium/discount based on our in-house methodology. We note that Pavilion Kuala Lumpur has secured approximately 20% of renewable energy to date as part of its ESG initiative.

Source: RHB Research - 29 Jul 2022