RHB Research has reiterated its buy call on Pavilion Real Estate Investment Trust (PREIT) with an unchanged target price (TP) of RM1.98, or 15% upside plus c.5% FY20F yield. 

In a note on Jan 24, the research house said Pavilion REIT’s full-year performance came in below expectations on higher operating costs overall, notably in electrical charges.

However, it said Pavilion Kuala Lumpur remains the REIT’s biggest contributor, at c.85% of its net property income (NPI), which casts a shadow over PREIT’s “black sheep” – Da Men. 

“Being a notable mall in the heart of Kuala Lumpur, we believe Pavilion Kuala Lumpur should remain unperturbed by the retail space oversaturation in the Klang Valley. 

“For 4Q19, Pavilion Kuala Lumpur demonstrated a steady qoq growth of c.1% in its revenue, despite NPI declining 3% qoq from more than 1% qoq growth previously. The mall’s occupancy rate improved to 98% (3Q19: 97%),” it said. 

The research house said Da Men Mall was still “the black sheep”. The mall registered growth for the quarter, reporting an NPI of RM500,000 in 4Q19 from a low base of RM100,000 in 3Q19.

“We note that Da Men’s occupancy improved marginally to 71.7% in 4Q19 from 69% in 3Q19. Management guided that rental rates for the mall should improve upon the opening of a cinema by year’s end, whose contributions should start trickling in from FY21.”

It added revenue increased 5.5% yoy on sturdy rental contributions from Elite Pavilion Mall, which was acquired at end-April 2018. 

Moving forward, it said tenant remixing initiatives at Elite Pavilion Mall should prop up its performance, contributing to the REIT’s topline in FY21.

“PREIT’s FY19 core net profit of RM247.6 mil (-2.9% yoy) – after having stripped off RM15 mil in valuation gains – is considered to have fallen short of expectations of 95% and 94% of our and street’s full-year projections,” it said. 

A dividend per unit (DPU) of 2.06 sen was declared for the quarter, amounting to a full-year DPU of 8.5 sen for FY19 (FY18: 8.78 sen) – a 4.8% yield.

Pavilion REIT opened 1.16% higher at RM1.75 before the midday break on Jan 24. – Jan 24, 2020

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