Pavilion REIT’s attractive dividend yield a boost

“Looking into the second half of 2020, we expect the shopper traffic and consumer spending to recover from the first-half low, but is unlikely to revisit the 2019 level within 2020-2021 due to the weak economic growth and cautious consumer sentiment, ” Affin Hwang Capital research said.

PETALING JAYA: Pavilion Real Estate Investment Trust’s (REIT) earnings will likely remain under pressure in the near term amid the tough retail environment.

But its attractive dividend yield could help cap the counter’s downside risks, according to some analysts.

For instance, despite announcing a subdued first-quarter results a day earlier, Pavilion REIT managed to close seven sen higher at RM1.73 last Friday.

One analyst told StarBiz that this was likely due to the REIT’s relatively attractive dividend yields vis-a-vis fixed deposits with banks because of the current low interest rate environment.

“In the current environment, the return from investing in the REIT is definitely more attractive, ” said the analyst with a bank-backed brokerage.

“Pavilion REIT’s upside will likely be limited by the subdued earnings outlook, but its attractive dividend yield will help support its share price, ” he added.

Brokerages at present have mixed calls on the counter.

Among the more bullish was AmInvestment Bank Research (AmInvest), which last week upgraded Pavilion REIT to a “buy” with a higher fair value of RM1.99, compared with RM1.56 previously.

The higher target price was a result of rolling over its valuation to the financial year ending Dec 31,2021, while reducing its target yield to 4.5% from 5% due to the recent interest rate cut by Bank Negara and potentially further interest cuts later this year.

“We view Pavilion REIT’s long-term outlook to be positive, given the diminishing rate of Covid-19 infections in Malaysia, while several stimulus plans by the government provide a greater earnings visibility.

“Furthermore, its dividend yields of 4.1% for 2020 and more than 5% for 2021 and beyond offer attractive returns compared to the current low interest rate environment, ” AmInvest explained.

AllianceDBS Research, on the other hand, said it expects the near-term operating environment to remain challenging for Pavilion REIT, citing the tough retail environment.

However, it was positive on Pavilion REIT’s pipeline of asset acquisitions, such as Pavilion Bukit Jalil and Pavilion Damansara Heights.

The brokerage has maintained its “hold” call on Pavilion REIT, with an unchanged target price of RM1.40.

CGS-CIMB Research has also recommended a “hold”. However, it had lowered its target price for Pavilion REIT to RM1.60 from RM1.79 previously, citing limited upside risk due to a subdued recovery in rental income in the second half of 2020.

Meanwhile, Affin Hwang Capital Research has maintained its “sell” call on Pavilion REIT, but has raised its target price to RM1.47 from RM1.42 previously.

“Looking into the second half of 2020, we expect the shopper traffic and consumer spending to recover from the first-half low, but is unlikely to revisit the 2019 level within 2020-2021 due to the weak economic growth and cautious consumer sentiment, ” it said.

Pavilion REIT saw a 36% decline in net property income to RM65.1mil in the first quarter ended March 31,2020, from RM101.5mil in the corresponding period last year on lower earnings from its retail and office portfolio.

The REIT attributed the lower earnings to the 14-day, rent-free period (March 18-31) given to tenants that were not able to provide essential services and supplies during the movement control order period.

For the quarter in review, Pavilion REIT’s net profit was halved to RM34.6mil from RM69.2mil, as revenue fell 23% to RM116.4mil from RM150.9mil in the previous corresponding period.Pavilion is one of the largest retail concentrated REITs in Malaysia.

Its assets are strategically located in the heart of the golden triangle of Kuala Lumpur and benefit from growth in the Malaysian economy.

The principal investment policy of the REIT is to invest in income-producing real estate used predominantly for retail purposes (including mixed-use developments with a retail component) in Malaysia and other countries within the Asia-Pacific region.

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