• Maintain NEUTRAL, with new DDM-derived MYR1.35 TP from MYR1.29, 9% upside and c.8% yield. Pavilion REIT’s FY23 results were in line with expectations, reporting strong DPU growth despite higher utility and borrowing costs thanks to the recovery in tourist spending. We maintain our call as we are more cautious on the outlook of retail spending this year amid increased competition and higher tax levied on upmarket consumers.

• Results in line. 4Q23 core profit of MYR81.7m (+15.8% QoQ, +25.7% YoY) brought FY23 earnings to MYR285.3m (+15.8%). This is in line with expectations, at 99% of our and Street estimates. Excluding Pavilion Bukit Jalil (PBJ), revenue and NPI grew 8.6% and 11.6%, primarily attributed to a strong recovery for Pavilion KL (PKL) and Elite Pavilion. NPI margin for the year fell slightly to 63.4% (FY22: 63.9%), partly dragged down by PBJ’s lower margin. The REIT recorded a FY23 DPU of 9.01 sen (FY22: 8.37 sen).

• Flagship malls leading the line. Revenue from PKL surpassed FY19’s figure (+7%) as management guided that 4Q23 tourist footfall was higher than that of the pre-pandemic level. The occupancy rates for PKL and Elite Pavilion were strong at 95-96%, improving from 91-92% in FY22. On the flipside, Da Men and Pavilion Tower worsen YoY as its reduced revenue was compounded by higher utility costs. Da Men’s NPL widened to -MYR8.3m (FY22: -MYR7.1m). Recovery prospects for Da Men continues to be challenging as management shared that the REIT is struggling to raise rental rates despite an improvement in occupancy levels (Dec 2023: 73.4%, Dec 2022: 64.5%).

• Outlook for PBJ: PBJ’s occupancy levels have improved to 88% in Dec 2023 from 83.6% when it was acquired in Jun 2023. However, management clarified that a lot of tenants are still ramping up their operations which would help to explain the low NPI margin of just 50%. As this is the third year since its opening, 59% of the mall’s NLA are up for renewal in FY24, with the bulk of it coming in December. Management is hopeful that occupancy will improve to >90% and that by December, the mall can record high-single digit to low-double digit rental reversions, which are coming off a low base compared to peers.

• Earnings adjustment. We increase our FY24F-25F earnings by 3% after adjusting for the full-year results. We also introduce our FY26F earnings of MYR372m, with flattish DPU growth as we expect the second tranche of the placement for the acquisition of PBJ to proceed in FY25 (to raise MYR550m). Our DDM-derived TP incorporates a 0% ESG premium/discount. Key risks: Higher/lower-than-expected rental reversions and occupancy rates, and higher/lower-than-expected margins.

Source: RHB Research - 26 Jan 2024