Pavilion Real Estate Investment Trust (Pavilion REIT) retail assets especially in prime locations are likely to remain resilient with the observed increase in occupancy rates contributing to its strength, according to Kenanga Research.
In its results note today (Oct 27), Kenanga Research said that however, the anticipated growth of the retail segment may face some headwinds due to persistent high inflation and concerns of higher cost of living, potentially impacting consumer purchasing power.
“Additionally, retailers could also still face challenges in maintaining their profitability due to increasing labour and utility costs.
“Nevertheless, it is worth noting that the group’s top mall, Pavilion KL, caters to the high-income group, which is expected to remain relatively unaffected given their financial security.
“Therefore, we anticipate Pavilion REIT to be in a favourable position in sustaining consistent earnings moving forward, even in the face of a challenging economic outlook,” it said.
Kenanga said Pavilion REIT’s 9MFY23 gross revenue grew 24% driven by better rentals across the board and maiden contribution from Pavilion Bukit Jalil.
It said that the REIT net core profit and DPU is within expectation, with 9MFY23 core net profit of RM203.5 million made up of 72% and 71% of our full-year forecasts and consensus full year estimates, respectively as well as A DPU of 2.15 sen (YTD: 6.56 sen).
The research house maintains its OUTPERFORM and its TP of RM1.47, with no adjustment based on ESG with 3-star rating.
This is based on its FY24F gross DPU of 8.5 sen against an unchanged target yield of 6.0%, derived from a 2.0% yield spread above our 10-year MGS assumption of 4.0%.
“The low yield spread is to reflect its prime asset portfolio as anchored by Pavilion KL and Pavilion Bukit Jalil.
“We believe these premium retail assets are less vulnerable to downward pressure on occupancy and rental rates amidst rising headwinds in the retail sector on the back of sustained high inflation that hurts consumer spending,” Kenanga Research said.
The risks to its call include rising risk-free rate, lower-than-expected rental reversions, weaker-than-expected occupancy rates and loss of footfall to new rival malls.
Kenanga Research also noted that Pavilion REIT’s net property income (NPI) for 3QFY2023 rose 34.5% to RM121.35 million following the inclusion of income from newly-acquired Pavilion Bukit Jalil.
“Pavilion KL remained the top contributor with net property income (NPI) at RM85.6m, accounting for 71% of total in 3QFY23. Following that, Pavilion Bukit Jalil contributed RM22.1m, making up 18% of the total NPI, surpassing Elite Pavilion Mall as the second-largest contributor from the previous quarter,” it said.
Kenanga added non-operating cost rose by 43%, largely driven by a significant increase in borrowing costs (+51%) from greater drawdowns to fund acquisitions, coupled by a rising rate environment.
“Overall, this affected 9MFY23’s earnings, but still translated to a distributable income and core net profit of RM217.7m (+16%) and RM203.5m (+12%), respectively.”
