9M16 realised net income (RNI) of RM180.4m came in well within our and consensus expectations at 74% and 70%, respectively. No dividends as expected. As such, we make no changes to our FY16-17E earnings of RM244.8-276.6m. Maintain OUTPERFORM call and TP of RM2.15, based on unchanged target gross yield of 4.4% on FY17E GDPU of 9.4 sen on a +0.8ppt to our 10-year MGS target of 3.60%.

9M16 RNI of RM180.4m came in well within our and market expectations at 74% and 70%, respectively. No dividends as expected.

Results Highlights. YoY-Ytd, top line recorded a strong 10% on acquisitions of Damen Mall and Intermark Mall. However, higher property operating expenses (+12%), expenditure (+9%) and higher financing costs (+84%) which were mostly incurred for the new malls dampened RNI growth which was flat YoY. QoQ, 3Q16 RNI was virtually flat on flattish GRI as most leases expiries are likely to occur in 4Q16.

Outlook. Management expects to spend RM20m on capex in FY16, mostly on energy efficiency improvement (such as improving efficiency of air conditioning power system) in Pavilion Shopping Mall (PSM), toilet upgrading works, enhancement to common corridor and creation of a new drop-off entrance at Jalan Bukit Bintang. 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. Looking forward to FY17, c.20% of leases will be up for renewal for PSM.

Pavilion Extension is expected to open in late November/early December 2016. While we do not have further information, we believe the acquisition is likely to occur in FY17. Meanwhile, Fahrenheit88 is still on the table, pending the sponsors’ intention to sell, while we believe PAVREIT may acquire should cap rates become more favourable i.e. closer to 6.5%.

Maintain OUTPERFORM and TP of RM2.15. We maintain our FY16- 17E earnings and TP of RM2.15, based on an unchanged target gross/net yield of 4.4%/4.0% on FY17E GDPU/NDPU of 9.4 sen/8.5 sen, on a +0.8ppt to our 10-year MGS target of 3.60%. We have applied the thinnest yield spread among MREITs under our coverage as we believe PAVREIT should be trading on thinner spreads due to its asset stability and expectations of future asset injections in FY17.

Risks to our call includes: (i) bond yield expansions, (ii) weaker-thanexpected rental reversions, and (iii) weak occupancy rates.

Source: Kenanga Research - 28 Oct 2016