No change to ‘buy’ call on Pavilion REIT

KUALA LUMPUR: Hong Leong Investment Bank (HLIB Research) is positive about the continued improvement in Pavilion Bukit Jalil’s (PBJ) rental contribution since being added to the real estate investment trust (REIT) last June.

The investment bank said in a note there remains a substantial rental contribution upside from PBJ, with a RM9.50 per sq ft rental rate up to the fourth quarter of 2023, as well as 59 per cent of the net lettable area (NLA) up for renewal this year.

“The expected improvement in tourist arrivals should also result in higher shopper footfall and tenant sales for its prime malls, Pavilion KL and Elite Pavilion Mall. Combined with management’s guidance of mid-single digit rental reversions for financial year 2025, earnings should continue to be sustained for the near to midterm.”

HLIB Research also said Pavilion REIT’s first quarter ended March 31, 2024 core net profit of RM83.2 million was within the investment bank’s (23 per cent) and consensus’ (25 per cent) predictions.

Its revenue increased by 9.2 per cent on the back of higher revenue rent from the retail malls.

Top line grew by 38.5 per cent thanks to an improved contribution from PBJ, as well as higher occupancy rates and revenue rent from the existing retail malls.

Nonetheless, higher total operating expenses, largely due to increased utilities (up 68.7 per cent) and maintenance costs (up 83.7 per cent), resulted in a 33.2 per cent increase in net property income in the first quarter of 2024.

HLIB Research has maintained a “buy” call on Pavilion REIT with a slightly higher target price of RM1.63.

It said its target price is based on financial year 2025 distribution per unit on a targeted yield of 5.4 per cent.

HLIB Research has also trimmed Pavilion REIT’s earnings forecast for financial years 2024 and 2025 by 1.5 per cent and 3.9 per cent, after imputing annual report updates.