Pavilion REIT (PAVREIT’s) 1QFY24 results beat expectations. Its 1QFY24 core net profit rose 19% YoY drive largely by contribution from new asset Pavilion Bukit Jalil.
Kenanga Investment Bank (Kenanga), in its Results Note today (Apr 26), said PAVREIT’s core shopping malls in KL city centre have held up relatively up despite competition from the new TRX mall.
Kenanga has raised their FY24-25F earnings forecasts by 2% and 5%, lifted their TP by 5% to RM1.59 (from RM1.51) and maintained their OUTPERFORM call.
PAVREIT’s 1QFY24 core net profit of RM83.2m made up 24% and 25% of our full-year forecast and the full-year consensus estimate, respectively. However, Kenanga considers the result as above expectations as they expect stronger quarters ahead from Pavilion Bukit Jalil. No distribution was announced for the quarter as PAVREIT typically makes bi-annual payments.
YoY, its revenue surged by 40% driven by: (i) contribution from its new asset Pavilion Bukit Jalil of which acquisition was completed in June 2023, and (ii) improved occupancy across its existing portfolio. However, its core net profit only increased by 19% due to: (i) higher utility costs, property expenses (seasonally peak refurbishment works) and financing cost (additional borrowings to fund the acquisition of Pavilion Bukit Jalil and an increase in interest rates).
QoQ, its 1QFY24 top line grew 5% driven by positive rental reversions. However, its core net profit only grew 2% due to seasonally higher maintenance.
Outlook. PAVREIT’s assets in the KL city centre, i.e. Pavilion KL and Elite Pavilion Mall, have been able to consistently chalk up higher occupancy despite the entry of the TRX mall. On one hand, we are mindful of the sustained elevated inflation (which could be exacerbated by subsidy rationalisation) that eats into consumers’ spending power. On the other hand, the return of tourists could potentially fill the gap.
Forecasts. Kenanga raised their FY24F-25F earnings forecasts by 2% and 5%, respectively, mainly to account for better earnings contributions from Pavilion Bukit Jalil.
Valuations. Correspondingly, Kenanga raised their TP to RM1.59 (from RM1.51) with FY25F NDPU to 9.5 sen (from 9.1 sen). This is 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.
Investment case. Kenanga believes PAVREIT’s 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. There is no adjustment to their TP based on ESG which is given a 3-star rating as appraised by them.
Risks to Kenanga’s call include: (i) rising risk-free rate, (ii) lower-than expected rental reversions, (iii) weaker-than-expected occupancy rates; and (iv) loss of footfall to new rival malls.
