Analysts say Pavilion REIT's earnings may pick up in 2H, keep 'buy' calls

• Net profit for the January-June period of RM150 million accounted for 44% of the consensus full-year estimate, though analysts expect earnings to catch up with forecasts on the back of higher tourist arrivals, year-end shopping season, and improved occupancy rates.

KUALA LUMPUR (July 18): Pavilion Real Estate Investment Trust's (KL:PAVREIT) earnings and dividends are expected to pick up in the seasonally stronger second half, analysts said and recommended investors continue accumulating the stock.

Net profit for the January-June period of RM150 million accounted for 44% of the consensus full-year estimate, though analysts expect earnings to catch up with forecasts on the back of higher tourist arrivals, year-end shopping season, and improved occupancy rates.

“We believe dividend may be higher in view of seasonally stronger retail sales” in the second half, and raised its dividend forecast to 9.1 sen from 8.9 sen, representing a yield of 6.5%, for full-year 2024, UOB Kay Hian said in a note.

“We believe the current valuation is appealing” with forward yield spread against the Malaysian Government Securities at 2.7 percentage points already above its five-year historical mean, the research house said.

Pavilion REIT’s units have gained about 17% year-to-date, thanks to higher shopper footfalls at key shopping malls and growth in rental reversions on the back of higher economic expansion and resurgent tourism activities.

In addition to Pavilion KL and the adjacent Elite Pavilion Mall in the Golden Triangle of Kuala Lumpur frequented by foreign tourists, the REIT also owns the Intermark Mall, Pavilion Bukit Jalil and Da Men Mall. The trust also has an office building, Pavilion Tower, in its portfolio.

Analysts remained broadly bullish with six out of eight maintaining their ‘buy’ calls on Pavilion REIT, while two have ‘hold’ ratings. The consensus 12-month target price is RM1.60, according to Bloomberg.

Kenanga Investment Bank said Pavilion REIT’s premium retail assets are less vulnerable to downward pressure on occupancy and rental rates amid rising headwinds in the retail sector on the back of sustained high inflation that hurts consumer spending.

“They will also benefit from the return of international tourists and higher tourist spending spurred by the weak ringgit,” it said.

For Maybank Investment Bank, Pavilion Bukit Jalil will continue to be the REIT’s growth catalyst, citing management target to raise the mall’s occupancy to 92% by end-2024 from the current 87.8%.

More than half of the tenancies are due for renewal in the fourth quarter, and about 70% intend to renew, it noted. The indicative rental reversion is 5% to 10%, and Pavilion Bukit Jalil could nearly triple its annual net property income to RM146 million by June 2025 from RM52.4 million in June 2024.

At the time of writing, Pavilion REIT was unchanged at RM1.41, valuing the property trust at RM5.16 billion.

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