• Maintain BUY, new DDM-derived MYR1.57 TP from MYR1.52, 16% upside with 6.5% FY23F yield. Pavilion REIT’s FY22 earnings met expectations, with numbers improving across all segments. With the retail sales momentum remaining strong, and Pavilion Kuala Lumpur (PKL) well- positioned to benefit from the increasing number of tourists, we remain positive on the REIT’s outlook. As the occupancy rate is a non-concern for its flagship mall, rental reversion is expected to be c.5-6% in FY23F.

• Results in line. 4Q22 core profit of MYR65m (+6.3% QoQ, +20% YoY) brought FY22 earnings to MYR246m (+95.8% YoY). This is broadly in line with expectations, at 104% and 105% of our and consensus estimates. On a YoY basis, revenue and NPI in the quarter improved 17%, mainly attributed to higher rental billings and turnover rent. With 64.7% of its borrowings based on floating interest rates, borrowing costs increased to MYR25.2m (+8.2% QoQ, +14.2% YoY). A DPU of 2.21 sen was declared for the quarter (4Q22: 1.85 sen), bringing full-year DPU to 8.37 sen (2021: 4.41 sen). This is close to the pre-pandemic 2019 DPU of 8.50 sen.

• A rising tide lifting all boats. The retail blended occupancy rate improved from 84% in 2021 to 86%, as all of Pavilion REIT’s shopping malls reported better numbers – although this is still below 2019’s blended occupancy rate of 93%. PKL leads the recovery, with NPI for the quarter improving 19.1% YoY and its occupancy rate growing from 90.2% in 4Q21 to 91.6%. Da Men Mall, with an occupancy of just 64.5%, continues to be loss-making with a net property loss of MYR7.10m in FY22 (FY21: -MYR9.18m), but management hopes it will return to black in FY23, with new tenants expected to come in. The blended rental reversion in FY22 was at 4-5%, with management guiding for a higher 5-7% rental reversion in FY23 on the back of the strong retail momentum.

• China tourists will be a boost. Management guided that 30% of PKL’s footfall pre-pandemic came from foreign tourists, with roughly 50% of that group coming from China. With the REIT already reporting normalised earnings without China tourists in FY22, the opening of the country’s borders is expected to provide another boost in the upcoming year.

• We adjust FY23-24F earnings by 4-6% and introduce our FY25 net profit forecast of MYR382m. The acquisition of Pavilion Bukit Jalil is still expected to be completed in 2Q23, and will help pare down the REIT’s current reliance on PKL. Our TP incorporates a 0% ESG premium or discount, based on our in-house methodology. We note that Pavilion REIT has entered into a MoU with Tanah Hijauan, to explore the purchase of green electricity generated by the latter’s solar power plant for Pavilion KL and Intermark Mall. Downside risks include weaker-than-expected retail performance, occupancy rates and rental reversions.

Source: RHB Research - 2 Feb 2023