• Maintain NEUTRAL with new DDM-derived MYR1.39 TP from MYR1.35, 7% upside and c.7% yield. Pavilion REIT’s 1Q24 results came in line with expectations, with growth mainly driven by higher occupancy rates and positive rental reversion but margins were lower due to higher maintenance cost. We retain our call as the performance of Pavilion Bukit Jalil (PBJ), being the second largest asset in the portfolio (by value), has not picked up as expected, and competition in the retail space within the city centre has stiffened due to the opening of new malls.

• Results in line. 1Q24 core profit of MYR83.2m (+1.8% QoQ, +18.7% YoY) was in line with expectations at 25% of our and Street’s estimates. As it is a seasonally stronger quarter, QoQ revenue increased 4.9% from higher revenue rent and occupancy rates, but NPI margin was lower at 62.2% (4Q23: 64.7%) as higher maintenance expense was recorded in the quarter. Excluding PBJ, which was acquired in Jun 2023, revenue and NPI grew a strong 7% YoY due to higher occupancy rates and positive rental reversions. PREIT’s DPU for the quarter amounted to 2.48 sen (4Q23: 2.45 sen, 1Q23: 2.37 sen).

• Property highlights. Pavilion Kuala Lumpur – contributing 62% to the REIT’s revenue – saw its topline growing by a solid 7% YoY (+5% QoQ). Similarly, Elite Pavilion’s revenue grew 13% YoY (-12% QoQ) – both malls are at above 95% occupancy rate as at end-Dec 2023. Intermark Mall – which benefitted from the return of the office crowd post-pandemic, recorded a strong 10% growth YoY (+10% QoQ). On a QoQ basis however, 1Q24 saw property expenses increasing 12% due to the replacement of aging parts, upgrading of landlord provisions for retail lots, and refurbishments for the lift lobby and toilets at Pavilion Tower.

• Cautious on PBJ. With a decent occupancy rate of 88% as at end-Dec 2023, we expect PBJ to be able to record at least high single-digit growth rental reversions in FY24 coming off its low base rental rate. However, NPI margins have only hovered around c.50% in the past three quarters, and it would need a significant improvement to meet the annualised MYR146m NPI target by June 2025. If the target is not achieved, the property would be revalued and could lower the total price paid for the property, but more importantly, it would mean the property did not perform as well as expected.

• We make no changes to our earnings forecast. We raise our TP after lowering our risk-free rate assumption in anticipation of a lower interest rate environment ahead. Our 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 Apr 2024