Pavilion Real Estate Investment Trust (April 26, RM1.80)
Maintain hold with an unchanged fair value (FV) of RM1.68: We maintain our “hold” recommendation on Pavilion Real Estate Investment Trust (REIT) with an unchanged FV of RM1.68 based on financial year 2019 (FY19) forward target yield of 5.5%.
Pavilion REIT’s first quarter of financial year 2019 (1QFY19) distributable income of RM72.2 million (+3.5% year-on-year [y-o-y]) came in within expectations at 25.6% and 26.5% of our full-year forecast and full-year consensus estimates respectively.
Its 1QFY19 revenue grew by 14.8% y-o-y mainly contributed by: i) revenue from new property, Elite Pavilion Mall (+RM14.7 million) where acquisition was completed in 2QFY18; and ii) higher revenue from Pavilion Kuala Lumpur Mall (+6.9%). Nonetheless, this was offset by lower revenue from Da Men Mall (-35.1% y-o-y) mainly from lower occupancy rate.
Net property income (NPI) improved by 14.1% y-o-y to RM101.5 million, in line with revenue growth.
Manager’s management fee rose by 13.7% y-o-y, mainly due to an increase in total asset value and NPI.
Net interest expenses were 46.6% higher as a result of the drawdown of additional borrowings for the acquisition of Elite Pavilion Mall and working capital purposes.
We keep our FY19 to FY21 numbers unchanged at RM280.9 million, RM292.6 million and RM302.4 million respectively.
Pavilion REIT proposed a distribution of 2.37 sen per unit for 1QFY19 as compared with 2.3 sen per unit y-o-y. We expect Pavilion REIT to distribute 9.2 sen, 9.6 sen and 10 sen for FY19 to FY21 respectively, translating into yields of 5.1%, 5.3% and 5.5% respectively.
Debt-to-asset ratio increased to 34.9% from 26.8% y-o-y, following the RM580 million acquisition of Elite Pavilion Mall through 100% debt financing.
Despite the challenging environment, we expect the outlook for retail properties, especially shopping malls, to remain stable in the short to medium term. The high occupancy rates are also due to strong management and brand names of the REITs; and shopping complexes becoming a one-stop centre for Malaysian lifestyle providing food and beverages and entertainment. — AmInvestment Bank, April 26
This article first appeared in The Edge Financial Daily, on April 29, 2019.