• Maintain BUY, with new DDM-derived MYR1.78 TP from MYR1.63, 13% upside and c.6% FY25F yield. Pavilion REIT’s 9M24 results were within expectations. Earnings improved sequentially off a seasonally slower quarter, although YTD, NPI margin was slightly lower from higher utility costs due to additional consumption and subscription of green electricity tariff. We remain positive on the REIT for its stable earnings outlook, with upside as a key beneficiary of the strong tourism recovery.

• Results in line. 3Q24 core profit of MYR78.9m (+17.6% QoQ, +11.8% YoY) brought 9M24 earnings to MYR229.2m (+12.6% YoY). This makes up 70- 69% of our and Street estimates. Note that 9M23 earnings made up 71% of FY23 earnings. YoY revenue grew from higher rental income from Pavilion Kuala Lumpur (PKL) and income from marketing event and exhibition centre from Pavilion Bukit Jalil (PBJ). Total property operating expenses in 3Q24 were 3% lower YoY mainly due to a reversal of doubtful debts provision, offsetting the increase in utility costs. The REIT recorded a DPU of 6.91 sen in 9M24 (9M23: 6.56 sen).

• Property highlights. In 9M24, PKL – which contributes 61% to the REIT’s revenue – saw its topline grow 4% YoY from higher average occupancy rates and rental reversions, but Elite Pavilion recorded 3% lower revenue YoY due to a loss of advertising income. Intermark Mall and PBJ both recorded a strong increase in revenue YoY in 3Q24 (+12% and +18%) supported by its higher average occupancy rates. Da Men Mall, however, continues to be loss making with a NPL of MYR5.7m in 9M24 (9M23: MYR6.7m), with management previously expressing difficulties in raising rental rates despite a gradually improving occupancy rate.

• Earnings forecast. As results were in line, we keep our earnings forecasts unchanged, but we raise our TP after lowering our cost of equity assumptions to reflect the better market sentiment for REITs. Our TP incorporates a 0% ESG premium/discount. We think PREIT’s outlook continues to be positive considering its strong asset quality and prime positioining which should continue to benefit as Malaysia aims to attract 35.6m tourists in 2026. Key risks: Lower-than-expected occupancy rates, rental reversions, and higher- than-expected bond yields.

Source: RHB Research - 25 Oct 2024