Period

4Q15/FY15

Actual vs. Expectations

FY15 realised net income (RNI) of RM241.3m came in within expectations, making up 100% of consensus estimate and 105% of ours.

Dividends

2H15 GDPU of 4.14 sen per unit (which includes a nontaxable portion of 0.10 sen). This implies FY15 GDPU of 8.23 sen (4.6% net yield), which makes up 104% of our FY15E GDPU estimates and hence within expectation.

Key Results Highlights

QoQ, GRI and NPI margins were flattish, with NPI margin at 71.5%. However, RNI increased marginally by 1% to RM61.0m mostly on: (i) lower maintenance expenditure (- 25%), (ii) lower utilities expenses (-4%).

YoY, GRI increased by 3% to RM413.9m on the back of: (i) higher rental income after completing AEI’s on the Beauty Precinct, Couture Pavilion, and Dining Loft, and (ii) higher service charge, which was revised in May-14. NPI and RNI margins were flattish at 70% and 58%, despite minimal increases in financing cost (+3%), due to a loan drawdown of RM45.6m in Aug-15 for working capital. Hence, FY15 RNI increased correspondingly with topline by 3% to RM241.3m.

Outlook

Management has spent RM13.1m CAPEX on various AEIs (i.e. creation of new drop-off entrance at Jalan Bukit Bintang, upgrading of toilets and common corridor) in FY15. In FY16, management expects to spend RM13m, mainly for improving efficiency of air conditioning power system in PSM.

FY16 is a major rental renewal year for the group with 69% of leases up for renewal. We expect this translates to 5.4% GRI growth from PSM.

The Damen Mall acquisition (announced in Sept-15) which we have factored in 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 Intermark Mall acquisition, which we have built into our estimates, is expected to be completed in 1QCY16.

The Pavilion Extension should be completed by 3Q16. While we have not built this into our estimates, the 250,000 sf mall will add c.10.5% to total NLA of the mall.

fahrenheit88 is still on the table which management may acquire should the cap rates are reasonable, i.e. closer to 6.5%.

Change to Forecasts

We made no changes to our FY16E RNI and introduce FY17E RNI. We are estimating gross yields for FY16-17E at 5.4-6.1% (net: 4.9-5.5%)

Rating

Maintain OUTPERFORM

Valuation

We maintain our call and TP of RM1.68 on FY16E GDPS of 8.4 sen (net: 7.6 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 - 15 Jan 2016