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Pavilion REIT’s outlook seen challenging due to spike in new Covid-19 cases

KUALA LUMPUR (Oct 23): The outlook for Pavilion Real Estate Investment Trust (REIT) has been seen as challenging due to the recent spike in new Covid-19 cases.

Analysts have cut their target prices (TPs) for the REIT as they see the outlook for it to be challenging due to the resurgence of the pandemic.

MIDF Research downgraded its rating of Pavilion REIT to "neutral" from "buy" and cut its TP to RM1.46 from RM1.73, while Hong Leong Investment Bank (HLIB) Research maintained its "hold" call but lowered its TP to RM1.49 from RM1.53.

Both research houses also cut their earnings forecasts for the REIT. For MIDF Research, it revised its forecasts for the financial year ending Dec 31, 2020 (FY20), FY21 and FY22 by -13.9%, -7.7% and -14.2% respectively as it expects lower rental income and higher maintenance cost going forward.

Meanwhile, HLIB Research cut its forecast by 8% for FY20 and 2.5% for FY21-22 to account for higher cost moving forward in light of cost associated with stricter hygiene practices.

MIDF Research analyst Jessica Low Jze Tieng said: “Pavilion REIT’s 9MFY20 (cumulative nine-month ended Sept 30, 2020) earnings of RM76.6 million came in below expectations, making up 63% and 54% of our and the consensus full-year estimates respectively. The negative deviation could be attributed to lower-than-expected rental income and higher-than-expected maintenance expenses in 3QFY20 (the third quarter ended Sept 30, 2020).

Moreover, Low said the research house expects rental income and shopper traffic to be weaker in 4QFY20.

“Meanwhile, [the] borders of Malaysia remain closed, which should continue to dampen shopper traffic at Pavilion KL as 30% of its footfall are tourists. Besides, the working-from-home order should also lead to lower footfall at Pavilion KL and Intermark Mall,” she added in a note today.

Aside from the resurgence of Covid-19 cases, HLIB Research analyst Nazira Abdullah said the research house remains cautious about the group’s 4QFY20 earnings given the announcements of cases in some shopping malls, which had put pressure on footfall at malls, affecting their tenants’ sales.

“Furthermore, we believe there could be risk of rental rebates being offered in 4QFY20 (to assist tenants during the low-footfall conditional movement control order or CMCO period), although we reckon its magnitude won’t be as drastic compared to the first MCO,” said Nazira.

At the time of writing, shares in Pavilion REIT had fallen two sen or 1.43% to RM1.38, bringing its market value to RM4.2 billion. It saw some 41,300 shares traded.

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