Period

2Q15/1H15

Actual vs. Expectations

1H15 realised net income (RNI) of RM119.8m came in within expectations, making up 50% of consensus estimate, and 52% of ours.

Dividends

1H15 GDPU of 4.09 sen per unit (which includes a nontaxable portion of 0.10 sen) was also within expectations, making up 52% of our FY15E GDPU of 7.91 sen (4.6% net yield).

Key Results Highlights

QoQ, GRI was down by 2% to RM102.9m on lower percentage rent (generally makes up 3% of total GRI), and advertising income at PSM. NPI margins improved by 1.0ppt to 70% on: (i) lower utilities, as 1Q15 saw higher electricity charge by TNB for 4Q14 adjustments, and (ii) lower operating expense, as 1Q15 saw higher marketing expenses from festive promotions and decorations. However, this was not sufficient to redeem bottomline as RNI declined by 2% to RM59.3m, on the back of lower interest income (-6%) and higher financing cost (+1%).

YoY, GRI increased by 4% to RM208.0m on higher rental income after completing AEI’s on the Beauty Precinct, Couture Pavilion, and Dining Loft, and on a higher service charge which was revised in May-14. Additionally, NPI margins improved by 2.0ppt to 70% on flattish operating cost, while higher interest income (+2.9%) helped to bump up RNI by 7% to RM119.8m.

Outlook

Management expects to spend CAPEX of RM34m on various AEI’s (i.e. upgrading of lifts, toilets and common corridor) at PSM in FY15, and this is still on track despite only RM4m was spent so far.

Damen is expected to be completed in 3Q15, while the Pavilion Extension should be completed by 2H16, and Fahrenheit88 acquisition is still on the table. While acquisition cap rates remain unattractive, we believe that the sponsor will move towards a more digestible rate required by PAVREIT in light of economic challenges ahead. However, it will take time and we anticipate that acquisition cap rates will become more realistic in the next 6-12 months.

Change to Forecasts

We make no changes to our FY15-16E RNI. We are estimating gross yields of 5.1%-5.4% (net: 4.6%-4.9%)

Rating

Upgrade to OUTPERFORM (from MP)

Valuation

We upgrade to OUTPERFORM and increase our TP to RM1.71 (from RM1.61) after rolling forward to a higher FY16E GDPS of 8.4 sen (net: 7.5 sen) (refer overleaf). Our TP is based on an unchanged target gross yield of 4.9% on a +1.0ppt yield spread to our 10-year MGS target of 3.9%. We have applied the thinnest yield spread among MREITs under our coverage as we believe PAVREIT may be trading on thinner spreads based on expectations of future asset injections in FY16-FY17.

Risks to Our Call

Bond yield expansions

Weaker-than-expected rental reversions

Weak occupancy rates

Source: Kenanga Research - 31 Jul 2015