Period

1Q16

Actual vs. Expectations

1Q16 realised net income (RNI) of RM61.5m came in within expectations, making up 24% of consensus estimate and 25% of ours.

Dividends

None, as expected.

Key Results Highlights

QoQ, GRI increased by 3% mainly due to higher rental income from retail segment. However, NPI margin was flat on higher operating costs incurred from increased maintenance cost. All in, RNI increased marginally by 1% as higher financing cost was incurred for the acquisition of Damen Mall and Intermark Mall in 1Q16.

YoY-Ytd, GRI was flattish, increasing by only 1%, whereas NPI margin improved by 2ppt, as the operating cost in 1Q15 was higher due to TNB’s adjustment for electricity charge for 2014. However, higher financing cost (+25%) incurred for the abovementioned asset acquisition led to a marginal increase of 2% in RNI.

Outlook

In FY16, management expects to spend RM13m, mainly for energy efficiency improvement (such as improving efficiency of air conditioning power system) in PSM and upgrading works.

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

The Pavilion Extension should be completed by 3Q16. While we have not built this into our estimates, the 250,000sf retail space 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

Unchanged. We are estimating gross yields for FY16-17E at 5.0-5.6% (net: 4.5-5.1%).

Rating

Maintain OUTPERFORM

Valuation

We maintain our call and TP of RM1.83 on FY16E GDPS of 8.4 sen (net: 7.6 sen). Our TP is based on an unchanged target gross yield of 4.6% on a +0.8ppt yield spread to our 10-year MGS target of 3.8%.

We have applied the thinnest yield spread among MREITs under our coverage as we believe PAVREIT should be trading on thinner spreads based on an expectation 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 - 29 Apr 2016