Pavilion REIT Sees Minimal Impact From Entry Of Rival Mall

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.

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