• Maintain NEUTRAL, with new DDM-derived MYR1.50 TP from MYR1.39, 6% upside and c.6% yield. Pavilion REIT’s 1H24 results were in line with expectations, recording higher occupancy rates across its portfolio. QoQ, earnings declined during the seasonally slower quarter, but we should see a pickup in 2H24 driven by the recovering tourism sector. With one year left to meet its NPI target, we think Pavilion Bukit Jalil (PBJ) might not meet its target and may be revalued lower than the initial MYR2.2bn price point.

• Results broadly in line. 2Q24 core profit of MYR67.1m (-19.3% QoQ, +6.7% YoY) brought 1H24 earnings to MYR150m (+13% YoY). This makes up 46% and 45% of ours and Street’s estimates. Excluding PBJ, revenue and NPI grew 5% and 4% in 1H24, mainly driven by stronger performance in Pavilion KL (PKL) and Intermark Mall, which offset poorer performance from Da Men and Pavilion Tower. NPI margin for the quarter is at 59.6%, lower YoY as it is dragged down by PBJ’s lower margins, as well as higher utility costs due to the subscription of green electricity tariff. The REIT recorded a DPU of 4.53 sen (1H23: 4.41 sen).

• Improving occupancy rates. PKL and Elite Pavilion’s occupancy rates are strong at 96% in June 2024 compared to 94% last year. PBJ’s occupancy rate has improved to 88% from 84%, and management is confident that it could rise to 92% by end of the year. Similarly, Intermark Mall saw its occupancy rate rise to 90% from 87%, with management guiding that it should rise further to 94%. On Da Men Mall, it remained loss-making in 1H24 with NPI of -3.8m (1H23: -MYR4.7m) despite a slightly improved occupancy rate of 75% (June 2023: 72%), as the REIT still finds it challenging to raise rental rates.

• Potential PBJ revaluation. Following the 1H24 results (PBJ NPI: MYR52.4m), we no longer expect PBJ to meet the MYR146m NPI target within two years of its acquisition (June 2025). This would have resulted in an extra MYR400m to be paid for the mall, funded by a proposed placement. As such, we adjust our earnings forecast with a constant share base for now, resulting in a higher DPU.

• Earnings forecast. We lower our FY25-26F earnings forecast by 3-5% after adjusting our operating and borrowing cost assumptions, but our DPU is raised 3-6% due to a lower share base. Our TP incorporates a 0% ESG premium/discount. Key risks: Higher/lower-than-expected rental reversions and occupancy rates, and higher/lower-than-expected margins.

Source: RHB Research - 18 Jul 2024