This article first appeared in The Edge Financial Daily on October 29, 2018
Pavilion Real Estate Investment Trust
(Oct 26, RM1.60)
Maintain neutral with an unchanged target price of RM1.60: Pavilion Real Estate Investment Trust’s (REIT) core net income for the nine months ended Sept 30, 2018 of RM188.4 million came broadly within our and consensus full-year estimates at 72% of full-year forecasts. The fourth quarter (4Q) is seasonally strong due to the year-end sales and holiday season.
The higher bottom line of RM188.4 million and top line of RM407.9 million were mainly due to contributions from Pavilion Elite, which started since April 2018. The better year-on-year (y-o-y) performance was also attributed to higher rental income from Pavilion Kuala Lumpur after a repositioning exercise as well as a higher occupancy rate for The Intermark Mall. Revenue for Pavilion Kuala Lumpur grew 7% y-o-y to RM328.5 million, while The Intermark Mall’s grew 16.7% to RM21.7 million. Revenue from the da:mén USJ mall, however, fell 14.7% to RM22.1 million. Pavilion Elite contributed RM25.85 million to the REIT’s top line to date.
On the other hand, operating costs increased due to the addition of Pavilion Elite, while the REIT also incurred higher borrowing costs, which grew 50.5% mainly due to the drawdown to fund the acquisition.
The better sequential quarter can be attributed to a full-quarter contribution from Pavilion Elite as well as higher quarter-on-quarter revenue from all its assets. Meanwhile, the average interest cost creeped up to 4.7% from 4.6% for the previous quarter.
Recall that Pavilion REIT accepted the invitation from Malton Bhd on Aug 13 to participate in the ownership of Pavilion Bukit Jalil where both parties entered into a non-disclosure agreement to start due diligence, discussion about the method of participation and negotiation of terms. The project consists of one block of five-storey retail spaces and two levels of basement car park.
We have made no changes to our assumptions as we deemed that the results were largely in line. We expect a stronger 4Q.
Although Pavilion REIT has recorded a commendable y-o-y growth, we believe that the growth has been largely priced in at the moment. With that, we have maintained our “neutral” recommendation. Our discounted dividend model-derived valuation is unchanged. Our dividend yield estimate is 5.1%. — MIDF Research, Oct 26