• Pavilion REIT’s realised net profit fell by 71% qoq to RM10m - dragged by rental rebates to tenants.
• The results were below market and our expectations.
• In view of the longer-than-expected rental assistance plan and slower recovery pace, we cut our 2020-22E earnings by 6-24%. Reaffirm SELL rating with a lower target price of RM1.38.

2Q20 realised net profit plunged by 71% qoq, more than expected

PREIT’s 2Q20 realised net profit fell by a sharp 71% qoq to RM10m due to rental rebates given to tenants amidst the implementation of the movement control order (“MCO”), lower percentage rent and advertising income. Revenue contribution contracted by 25.5% qoq to RM86.7m while NPI fell 40% qoq to RM39.1m. Tracking the lower profit, management has declared a lower 2Q20 DPU of 0.40 sen (-66.9% qoq and -80.3% yoy).

Sequentially, 6M20 realised earnings fell by 65%, below expectations

Similarly, PREIT’s 6M20 realised net profit fell by 65% yoy to RM44.6m due to the above-mentioned factors. We also note that during the MCO/CMCO period, PREIT had made some facemask contributions to the Malaysian Government to support the fight against Covid-19 along with increasing provision for doubtful debts, which partly led to the lower NPI of RM104m. Overall, the results were below market and our expectations – making up 25% and 28% of street and our full-year forecasts.

The worst is over; expecting some recovery in 2H20 onwards

We believe the worst is over for the retailers, having witnessed a higher-than-expected weakness in 2Q20. Moving forward, we believe 2H20 earnings will improve, albeit at a slower pace as footfall and consumer spending gradually return to normal. We gather that management will prioritise retention of tenants during this challenging time but in a reasonable manner. Thus, we cut our FY20-22E earnings to reflect the lag in earnings recovery.

Maintain SELL with alower DDM-derived target price of RM1.38

We reiterate our SELL rating for PREIT with a lower target price of RM1.38 as we cut FY20-22E earnings by 24%/13%/6% respectively in view of the longer-than-expected rental assistance plan and slower recovery pace. At 3.9% 2021E distribution yield, PREIT is trading below its 8-year average yield of 5.1%, which is pricey considering the challenging business outlook. Upside risks are spike in consumer spending, interest rate cuts and compression in MGS.

Source: Affin Hwang Research - 24 Jul 2020