Pavilion REIT (PAVREIT) 1HFY23 net profit of RM132.9m was within expectations, accounting for 47% of both Kenanga Research (Kenanga) full-year forecast and consensus full-year estimate.
“A distribution per unit of 0.76 sen is also within expectations. YoY, 1HFY23 gross revenue jumped 18% with the Net Property Income (NPI) rising by 15% as its business benefited from shopper traffic stabilising post-pandemic,” said Kenanga in the recent Results Note.
Cumulatively, Pavilion KL was the top contributor with NPI of RM173.7m, making up 86% of total NPI in 6MFY23. This was followed by Elite Pavilion Mall, which contributed RM20.2m.
Non-operating cost rose by 27%, mainly led by higher borrowings. Notably, QoQ borrowing cost also saw an increase of 83%, which Kenanga believes is mainly caused by heightened borrowings booked in 2QFY23 as the group completed its acquisition of Pavilion Bukit Jalil in June 2023.
Overall, this diminished 1HFY23’s profitability but still translated to a distributable income and core net profit of RM139.4m and RM132.9m, respectively.
The group’s key assets in Pavilion KL are expected to experience encouraging occupancy rates as its prime location is highly desired by upmarket retailers. However, occupancy numbers may see a slight bump in the near term following the relocation of certain high-profile tenants.
“Meanwhile, Pavilion Bukit Jalil is now an active asset in PAVREIT’s portfolio, with a tenancy ratio progressively picking up to 85%. We anticipate this to be its recent high since its launch in late 2021,” said Kenanga.
Meanwhile, the group’s sole loss-making asset, Da Men Mall, is being closely tracked with strong efforts to raise its tenancy ratio closer to 80%, which could be its breakeven point from 72% at present. The group hopes to achieve this by 2025 with a possible rebranding of the mall to refresh its image. Kenanga maintains Outperform with a Target Price of RM1.47.
“We believe the current share price reflects an underappreciation of its portfolio of premium retail assets, where we reckon consumer spending could be less susceptible to inflationary headwinds,” said Kenanga.
Risks to Kenanga’s call include bond yield expansion, higher/lower-than-expected rental reversions, and higher-than-expected occupancy rates.
