• Pavilion REIT’s 4Q20 realised net profit grew 25% qoq to RM40m from higher contributions across all assets except Intermark
• Overall FY20 results exceeded our expectations. The variation to our forecast was due to stronger earnings recovery in 4Q20
• In view of the weak share price, we maintain our BUY call on PREIT, especially after taking into consideration a more positive retail outlook post 1H21. We also maintain our target price of RM1.53

4Q20 Realised Net Profit Grew by 25% Qoq to RM40m

PREIT’s 4Q20 realised net profit grew by 25% qoq to RM40m as NPI improved 12.5% qoq to RM68.5m from higher contributions from all asset segments except Intermark which saw a fall in occupancy during the quarter. Notably, NPI contribution from Pavilion KL grew 12.3% to RM61.1m while Da Men mall NPI loss narrowed by 20% qoq to -RM2.7m. Overall, NPI margin remained firm at 52.3%. A fair-value loss of RM70.3m was recognised during the quarter (vs RM15m gain in 4Q19). Tracking the higher profit, management has declared a higher 4Q20 DPU of 1.39 sen (+23% qoq and -32.5% yoy).

FY20 Realised Net Profit of RM117m (-53% Yoy) Was Above Expectations

Cumulatively, PREIT’s FY20 realised net profit fell by 52.9% yoy to RM116.7m due to a 12.8% decrease in revenue from lower advertising income and lower mall occupancy from non-renewal for some expired tenancies. NPI was also 37.8% lower yoy due to rental rebates given to tenants, higher sanitisation costs, consultancy cost to evaluate cooling tower systems, LED light replacement, and higher provision of doubtful debt. In tandem with the earnings decline, a lower dividend of 4.13 sen was declared for FY20 (-51.4% yoy). Overall, the results were above market and our expectations – making up 106% and 117% of street and our full-year forecasts. The beat was due to better earnings contribution in 4Q20. Despite the reimplementation of CMCO, tenants’ sales picked up strongly in December, due to the allowance of interstate travel and attractive end-year campaigns.

Management is confident that the retail industry will recover in the year ahead

Management is optimistic on its 2021 outlook and expects faster earnings recovery in 2H21 following the distribution of the Covid-19 vaccine. PREIT remains steadfast in attracting visitors to its malls under safe conditions. With a focus on local shoppers, the malls embarked on multiple strategies to encourage retail spending and meet the needs of new shoppers’ profiles. Elsewhere, occupancy at Pavilion KL remains stable with the opening of 40 brands in the mall during the pandemic.

Source: Affin Hwang Research - 29 Jan 2021