This article first appeared in The Edge Financial Daily on July 29, 2019
Pavilion Real Estate Investment Trust
(July 26, RM1.90)
Maintain buy with an unchanged target price (TP) of RM2: Buy this top sector pick, with a TP of RM2, offering a 6% upside plus 5% financial year ending Dec 31, 2019 (FY19) yield (11% total return).
First half financial year ended June 30, 2019 (1HFY19) earnings are broadly within our/street estimates, as Da Men Mall incurred losses in the second quarter.
We expect the mall’s earnings to gradually improve, as management plans to bring in some new key tenants. We believe Pavilion Kuala Lumpur Mall’s strong positioning and potential upside from newly injected Elite Pavilion Mall should continue to drive the real estate investment trust’s (REIT) performance ahead.
Pavilion REIT’s 1HFY19 core net profit of RM128.5 million is broadly in line with our/Street estimates. 1HFY19 revenue increased by 10.7% year-on-year (y-o-y), mainly contributed by income from Elite Pavilion Mall, which it acquired in end-April 2018, as well as higher rental revenue and electricity income from Pavilion KL Mall (for supplying electricity to Pavilion Hotel KL and Pavilion Suites).
This was offset by lower rental income from Da Men Mall, as a result of its lower occupancy and rental rates.
Meanwhile, 1HFY19 core net profit growth decelerated to 1.8% y-o-y due to operating expenses incurred by Elite Pavilion Mall; higher costs incurred for providing power supply to Pavilion KL Hotel and Pavilion Suites; a hike in the electricity tariff and higher marketing costs on Da Men Mall to attract more shoppers.
Pavilion KL Mall’s second quarter ended June 30, 2019 (2QFY19) revenue and net property income (NPI) grew by 11% and 5% respectively on a mid-single digit rental reversion.
Having said that, its occupancy rate dropped to 96% (versus 98% in the previous quarter) on a change in tenants. It now accounts for 84% of the REIT’s total NPI.
About another 31% of leases will be up for renewal this year, and management expects the mall to continue recording healthy low single-digit rental reversions.
Da Men Mall’s NPI turned negative for the first time since the REIT acquired the mall in 2016. Its occupancy rate has continued to decline for four consecutive quarters to 65%.
Having said that, the management has guided that the occupancy rate should gradually improve as it plans to bring some new key tenants on board.
Pavilion REIT is a top sector pick, as we have conviction in the strong positioning of Pavilion KL Mall and the potential upside from newly injected Elite Pavilion Mall — which should continue to drive the REIT’s performance. — RHB Research Institute, July 26