Investment Highlights

• We maintain our BUY recommendation for Pavilion REIT (PREIT) at an unchanged fair value of RM1.75 based on a lowered distribution target yield of 4% (from 4.5% previously) given the current low interest rate environment. We make no ESG related adjustment to our FV based on our 3-star rating (Exhibit 3).

• However, we cut our distributable income forecasts by 10% to RM214.6mil for FY22F and 7% to RM241.6mil for FY23F. Our lower forecasts largely reflect more conservative assumptions for rental recovery at the malls, taking cue from the recent spike in Covid-19 cases locally and globally, which could lengthen the timeline for our country to open our borders to international tourists, thus dampening the footfall recovery at PREIT's malls.

• Historically, international tourist footfall makes up 30% at Pavilion Mall, which contributes to more than 90% of PREIT’s net property income (NPI).

• PREIT's 1QFY21 distributable income of RM33.5mil (- 9.2% YoY) accounted for 21% of our full-year forecasts and 19% of the consensus' full-year estimates. We consider the results within expectations given our expectations of a weaker 1Q due to the MCO 2.0.

• PREIT's 1QFY21 revenue of RM 126.2mil declined by 6% YoY (vs. RM134.3mil in 1QFY20), mainly due to lower occupancy rate for malls because of non-renewal of some expired tenancies, as well as lower marketing events and advertising revenue. This was exacerbated by the longer MCO 2.0 period during the quarter compared to the MCO 1.0 back in 2020.

• Meanwhile, 1QFY21 NPI fell by 10% YoY to RM58.8mil mainly due to lower revenue, which was partly offset by decreased property operating expenses, largely from electrical costs savings and lower marketing expenses.

• Distributable income contracted by 9% YoY to RM33.5mil, mainly because of the lower NPI, partly offset by slightly lower management fees, in line with the decrease in total assets value and NPI, and lower borrowing costs for the quarter on lower interest rate.

• On a QoQ comparison, PREIT's gross rental revenue has dropped by 3.5% mainly due to lower occupancy rate for malls, as well as fewer marketing events and weaker advertising revenue, resulting from the MCO 2.0 during the quarter as compared to mainly the CMCO in 4QFY20.

• Likewise, the company's NPI tumbled by 14% QoQ as compared to RM68.5mil in 4QFY20, while distributable income shrank by 21% QoQ from RM42.4mil in 4QFY20, mainly because of the lower revenue recorded, partly offset by the lower property operating expenses.

• During the quarter, we observed that among the retail malls owned by PREIT, Elite Pavilion Mall recorded the biggest decline in revenue YoY (-22.4% YoY), followed by Da Men Mall (-14.9% YoY), Intermark Mall (-6.2% YoY), and Pavilion KL Mall (-3.8% YoY). We believe the larger decline in revenue from Elite Pavilion Mall could be due to the less stable relationship with its tenants, as well as higher supply of retail space as compared to demand, given it being a relatively new mall (ie. only less than 4 years in operation before the pandemic hits). On a positive note, we take comfort that Pavilion KL Mall’s rental rates (the main retail mall own by PREIT) has remained resilient during the pandemic, with only a small decline in revenue recorded YoY, thanks to the more stable and mature tenant base with stronger financial ability to sustain throughout the pandemic.

• On a QoQ comparison, Elite Pavilion Mall has also recorded the biggest decline in revenue QoQ (-14.6% QoQ), followed Intermark Mall (-8.7% QoQ) and Pavilion KL Mall (-2.2% QoQ). This stemmed from a less stable tenant base and higher retail space supply as compared to demand at Elite Pavilion Mall. Pavilon KL Mall continues to remain more resilient as compared to the other malls given its stronger relationship with tenants, as well as the better quality tenants. On the other hand, Da Men Mall has recorded a revenue growth of 5.8% QoQ. We believe this is largely because of the moving in of new tenants (which were supposed to move in earlier but was postponed due to the delay in renovation work as a result of the various MCOs), thus contributing positively to the rental income at the mall.

• PREIT has incurred RM8.5mil for capital expenditure (capex) to develop a new retail space at the end of the Couture precinct and glass kiosk outside Fashion Avenue at Pavilion Mall in 1QFY21. Moving forward, PREIT will continue to improve its performance and support its tenants by sustaining healthy occupancy levels through proactive lease management; extend its reach to shoppers by leveraging on aggressive marketing strategies, creative initiatives and the use of technology.

• Reflecting the lower results, PREIT’s proposed distribution income declined by 9% YoY to 1.1 sen per unit for 1QFY21 (compared with 1.2 sen per unit in 1QFY20). While we maintain our FY21F distribution projection of 5.20 sen, we lower our distribution projections to 7.1 sen (from from 7.8 sen) for FY22F and 7.9 sen (from 8.5 sen) for FY23F. This translates into FY21F–23F dividend yields of 3.7%, 5.0% and 5.7% respectively.

• PREIT’s debt-to-asset ratio stayed relatively unchanged at 30% (vs. 29% previously in FY20), well below the regulatory threshold of 60% (temporarily raised from 50% up to 31 December 2022 by the Securities Commission, being a Covid- 19 relief measure). As such, PREIT does have some headroom to gear up for new acquisitions.

• We believe PREIT’s long-term outlook remains positive given its strategic assets which are located in the heart of the capital in Malaysia, and are poised to benefit from the growth in Malaysia’s economy post-pandemic. We like PREIT as a recovery play as well as a yield play, with attractive dividend yields of more than 5% for FY21 and beyond amidst a low interest rate environment that is likely to be prolonged.

Source: AmInvest Research - 30 Apr 2021