Festivity-led retail boost in 2QFY22
- 1HFY22 results were above expectations; core net profit surged 53% yoy.
- Outlook for KL malls to stay positive in 2H; DA MEN mall still NPI negative. Pavilion Bukit Jalil acquisition plans remain a work-in-progress (no timeline).
- Retain Hold rating with higher TP; FY22-24F dividend yields are 5.4-5.7%.
1HFY22 results above expectations; core net profit surged 53% yoy
Pavilion REIT’s 1HFY22 core net profit beat expectations at 61-62% of our and consensus full-year forecasts. Key deviations were: 1) vibrant retail activity in conjunction with Chinese New Year (CNY) in 1QFY22 and Hari Raya celebrations in 2QFY22; retail spending was noticeably stronger than usual in 2QFY22, thanks to special EPF withdrawals, and 2) stronger NPI margin due to zero rental support provided. This was reflected in 2QFY22’s 13.4% yoy (+2% qoq) growth in revenue while core net profit jumped 212%, with NPI margin of 56% vs. 38% in 2QFY21. We believe retail sales have returned to pre-pandemic levels but could taper off in 2HFY22 in view of the OPR hikes and inflationary pressures. Nevertheless, the group guided that rental assistance ceased in 1HFY22 and will not be revived in 2HFY22. 1HFY22 revenue increased 11.7% yoy while NPI surged 66.3% yoy; 1HFY22 NPI margin of 63% (1HFY21: 42%) was higher than our forecast of 61%. Overall, core net profit grew 136% yoy. 2QFY22 DPU of 1.9 sen brings 1HFY22 DPU to 4.1 sen, at 58% of our full-year forecast of 7 sen.
Positive recovery outlook in 2H; DA MEN still in the red
During the conference call, the group said it remained optimistic that the retail sector recovery will continue into 2HFY22F despite the OPR hikes and inflationary environment. Pavilion KL’s occupancy rate stood at 89.7% at end-Jun but the group guided that this is likely to rise to around 92% by end-FY22F on tenant repositioning exercises and incoming new tenants. Anchor tenant Parkson’s 3-year rental step-up will be due in FY22F and could result in positive (single-digit) rental reversion. For Pavilion KL, 52% of its NLA will be due for renewal in FY22F (Parkson makes up the majority). Intermark Mall’s and Elite Pavilion Mall’s tenancy expiry profiles stood at relatively high levels of 39% and 54%, respectively. The key challenge into 2HFY22 remains DA MEN mall. Occupancy rate slipped from 62% in 1QFY22 to 58.8% in 2QFY22 on non-renewals (20% of NLA expiring in FY22F). The group will continue to focus on stabilising and enhancing tenant mix (focus on F&B); signed-up occupancy rate is 72% for 2HFY22. The group targets DA MEN mall to break even in FY23F and turn profitable in FY24F. On acquisitions, there were no major updates on the planned acquisition of Pavilion Bukit Jalil (opened in Dec 21, c.50% occupancy rate).
Retain Hold call with higher TP
We lift FY22-23F EPS/DPU by 3.3-3.4% on higher NPI margins. Our DDM-based TP rises slightly to RM1.39 on higher COE of 7.2% (7.1% previously) due to higher adjusted beta. Reiterate our Hold rating, supported by FY22-24F dividend yields of 5.4-5.7%. Upside risk: potential injection of Pavilion Bukit Jalil. Downside risk: weaker earnings.