• Maintain BUY, with new MYR1.46 TP from MYR1.57, 20% upside and c.7% yield. Pavilion REIT’s 1H23 results were in line with occupancy rates remaining stable and positive rental reversions. This quarter marks the first income contribution from Pavilion Bukit Jalil (PBJ) for one month following the acquisition in June. Pavilion Tower saw its occupancy rate decline following the loss of a tenant, and replacing the tenant may take an extended period considering the challenging office market.

• Results within estimates. 2Q23 core profit of MYR62.9m (-10.2% QoQ, +14.4% YoY) brought 1H23 earnings to MYR132.9m (+10.6% YoY). This is in line with our and consensus expectations at 44-47% as 2H23 will be stronger following the addition of PBJ. Interest expense increased (+20.4% QoQ, +47.6% YoY) due to the additional MYR1bn borrowings for PBJ and increase in interest rates. On a same-store basis, revenue and NPI dropped by 7% and 8% QoQ due to a seasonally slower quarter, but improved 3% and 13% YoY. 2Q23 DPU of 2.04 sen brought 1H23 DPU to 4.41 sen (1H22: 4.08 sen).

• Lower occupancy in Pavilion Kuala Lumpur Mall (PKL) and Pavilion Tower. QoQ, PKL’s occupancy rate dropped slightly to 93.9% from 95.3% (4Q22: 91.6%). We understand that it is a temporary drop as the REIT is reallocating the space within the mall in anticipation of new tenants that will come in. Pavilion Tower’s occupancy fell to 66% from 73% following the end of a lease agreement. With no more leases up for renewal this year, the occupancy rate should not decline further, but finding a new tenant to fill up the space may prove difficult due to the supply demand imbalance in the office sector.

• Sales momentum remain strong. While the reopening of China’s borders has not yielded the influx of tourists that the industry expected, retail sales momentum remains strong. As a result, management guided for c.5% rental reversions in FY23. We think there should be more upside once the tourism industry improves, but we are mindful of the impact of the proposed luxury tax (details yet to be announced) on tenant sales.

• Da Men on a 3-year turnaround plan. Da Men’s NPL narrowed to MYR2.24m in 2Q23 (1Q23: -MYR2.51m, 2Q22: -MYR2.91m) as its occupancy rate ticked up to 72.2% (Mar 2023: 71.7%, Jun 2022: 58.8%). Management is hopeful that the mall can breakeven in FY25 as occupancy rate improves, with a focus on education tenants which has seen encouraging demand in the mall.

• Maintain BUY. We lower our FY23F-25F by -3 to -5% after adjusting our long term occupancy and rental reversion assumptions. Our TP incorporates a 0% ESG premium. Downside risks include weaker-than- expected occupancy rates, and rental reversions.

Source: RHB Research - 28 Jul 2023