Period

3Q15/9M15

Actual vs. Expectations

9M15 realised net income (RNI) of RM180.3m came in within expectations, making up 74% of consensus estimate and 78% of ours.

Dividends

None, as expected.

Key Results Highlights

QoQ, GRI was flattish, but NPI margins improved by 1.0ppt to 71% on lower maintenance expenses. RNI increased marginally by 2% to RM60.5m on: (i) lower expenditure (-7%), and (ii) higher interest income (+20%), and (iii) despite a slight increase in financing cost (+5%) due to a drawdown in Aug-15 for working capital.

YoY, GRI increased by a mere 3% to RM310.5m 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. NPI and RNI margins were flattish at 70% and 58%, respectively, due to corresponding increases in expenditure (+3%) a minimal increase in financing cost (+1%). As a result, bottomline increased in tandem with topline by 3% to RM180.3m.

Outlook

Management expects to spend CAPEX of RM34m on various AEIs (i.e. upgrading of lifts, toilets and common corridor) at PSM in FY15, and this is still on track despite only RM10.3m being spent so far.

The Damen Mall acquisition (announced in Sept-15) is expected to be completed in 2QCY16 upon due diligence by the Trustee, and the Vendor completing construction, with tenancy of not less than 85% of NLA.

The Pavilion Extension should be completed by 2H16, while the fahrenheit88 acquisition is still on the table. We do not expect the acquisition of fahrenheit88 to occur so soon after Damen Mall to avoid straining its balance sheet, but management may acquire fahrenheit88 should the cap rates are reasonable, i.e. closer to 6.5%.

Change to Forecasts

We make no changes to our FY15-16E RNI. We are estimating gross yields of 5.2-5.5% (net: 4.7-5.0%)

Rating

Maintain OUTPERFORM

Valuation

We maintain our call and TP of RM1.67 on FY16E GDPS of 8.4 sen (net: 7.5 sen). Our TP is based on an unchanged target gross yield of 5.0% on a +1.0ppt yield spread to our 10-year MGS target of 4.0%. We have applied the thinnest yield spread among MREITs under our coverage as we believe PAVREIT should 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 - 30 Oct 2015