FY16 realised net income (RNI) of RM235.3m met both consensus and our expectations at 96%. FY16 GDPU of 8.24 sen is also within expectation (98%). We make no changes to FY17E earnings and introduce FY18E. Maintain OUTPERFORM and TP of RM1.89, based on a +0.8ppt yield spread to our 10-year MGS target of 4.20%.

FY16 realised net income (RNI) of RM235.3m came in within both consensus and our expectations at 96%. Distribution-wise, an interim dividend of 4.08 sen was declared (which includes a 0.15 sen non-taxable portion), bringing FY16 GDPU to 8.24 sen which is well within our expectation, making up 98% of our FY16E GDPU of 8.40 sen.

Results Highlights. YoY-Ytd, GRI was up by a strong 11% on acquisitions of Damen Mall and Intermark Mall in Mar-16. However, higher property operating expenses (+18%), expenditure (+10%) and higher financing costs (+89%) which are mostly incurred for the new malls hampered RNI growth, which saw a decline of 2%. QoQ, 4Q16 RNI declined by 8% on the back of a flat top line and higher operating cost (+10%) from higher maintenance and property operating expenses.

Outlook. FY17-18 will see c. 24-22% of NLA up for expiry on modest single digit reversions. Pavilion Elite opened in 4Q16 and we expect the acquisition to occur close to mid-FY17. Meanwhile, Fahrenheit88 is still on the table, pending the sponsor?s intention to sell, while we believe PAVREIT may acquire should cap rates become more favourable, i.e. closer to 6.5%. Additionally, as we previously highlighted, we reckon PAVREIT could potentially acquire 3rd party assets from WCT (which owns Paradigm Mall and AEON Bukit Tinggi) as Tan Sri Desmond Lim is now a major shareholder. With a low gearing of 0.25x currently, PAVREIT could gear up by RM850m before reaching its internal gearing limit of 0.35x, or consider a cash call which could raise c.RM550m assuming a 10% placement.

Maintain FY17E earnings and introduce FY18E. We maintain FY17E earnings of RM276.6, and introduce FY18E of RM285.6m. We expect strong earnings growth in FY17E (+17%) as FY16 was a major lease expiry year with 69% of NLA up for renewal with mid- range single digit reversions, which mostly accrete in FY17E. As such, FY17-18E NDPU are 8.5-8.7 sen which translates to 4.7-4.8% net yield.

Maintain OUTPERFORM and TP of RM1.89. Our TP is based on an unchanged target gross/net yield of 5.0%/4.5% on FY17E GDPU/NDPU of 9.4 sen/8.5 sen, on a +0.8ppt to our 10-year MGS target of 4.20%. 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 on expectations of future asset injections in FY17. Due to these reasons, PAVREIT remains our Top Pick, commanding the highest total returns among MREITs under our coverage at 9% currently coupled with acquisition excitement. Risks to our call include: (i) bond yield expansion vs. our target 10-year MGS yield, and (ii) weakening rental income.

Source: Kenanga Research - 20 Jan 2017