Pavilion Reit posted RM55 million in profits for its second quarter report, this is a substantial 168% rise coming from a low base in 2021 due to lockdowns, the result takes the group’s first half net profit to RM120.2m which substantiated to a 133% year on year increase
The result, however, is reported to be slightly below Kenanga’s expectations. Despite the YoY, net profit surged 169% to RM55 million, quarter on quarter topline was broadly flat (+2%) but net profit slipped (-16%) as net property income declined 12% from RM94 million to RM83.1m, attributable to a 30% increase in “other operating expenses” (mainly because of higher upkeeping costs that were previously deferred).
The key profit generator continues to be Pavilion Kuala Lumpur Mall, which contributed RM154.4 million or 87% of total net property income in the first half.
Following the result we are adjusting the target price
As for the outlook, the company has indicated that shopping traffic at its prime malls is now approximately 85% of the pre-pandemic level. While the positive momentum from 1HFY22 will likely continue with the resumption of economic activities, business sentiment may turn cautious ahead in view of the rising inflationary environment and possible recession fears.
Within its asset portfolio, Pavilion Kuala Lumpur Mall and Elite Pavilion Mall have seen high occupancy rates (of 89.7% and 86.7%), which are expected to climb further by year-end following the repositioning of new/existing tenants amid ongoing rental renewal negotiations. As for loss-making DA MEN Mall (which incurred net property loss of RM3.2m in 1HFY22), Kenanga gather that its occupancy rate may rise from 58.8% at end-June to slightly above 70% by year-end as PAVREIT is targeting this property to break even next year before turning profitable in 2023.
Following the results, Kenanga is tweaking the forecast adjusting to RM232.7m (-3.4%) for FY22 and RM248.5m (+0.9) for FY23 after taking into operating cost assumptions.
Subsequently, the share target price has been revised to RM1.42 (from RM1.30) based on a target yield of 6.0% (which is derived from a 1.5% yield spread above our 10-year MGS assumption of 4.5%).
