1Q17 realised net income (RNI) of RM57.0m met both consensus and our expectations at 22% and 21%, respectively. No dividends, as expected. We make no changes to FY17-18E earnings of RM276.6-285.6m. Maintain OUTPERFORM and increase TP to RM1.94 (from RM1.89) as we roll forward to FY18E, on a +0.8ppt yield spread to our 10-year MGS target of 4.20%.

1Q17 realised net income (RNI) of RM57.0m came in within both consensus and our expectations at 22% and 21%, respectively. No dividends, as expected.

Results Highlights. YoY-Ytd, GRI was up by 11% on acquisitions of Damen Mall and Intermark Mall (in Mar 2016). However, higher expenditure (+11%) and higher financing costs (+78%) which were mostly incurred for the acquisition of the new malls dragged down RNI growth by 7%. QoQ, 1Q17 RNI was up by 4% on the back of a marginal top line growth (1%) on positive reversions, backed by lower operating cost (-1%) and expenditure (-5%).

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. Fahrenheit88 acquisition is still on the table, pending the sponsor’s intention to sell, while we believe PAVREIT is eyeing a cap rate closer to 6.5%. Additionally, as we highlighted previously, 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.RM530m assuming a 10% placement. As such, we make no changes to FY17-18E earnings of RM276.6-285.6m.

Maintain OUTPERFORM and increase TP to RM1.94 (from RM1.89). We upgrade our TP post rolling forward our valuations to FY18E GDPS/NDPS of 9.7 sen/8.7 sen, and on an unchanged spread of +0.8ppt to our 10-year MGS target of 4.20%. We have applied the thinnest yield spread among MREITs under our coverage (between +0.8ppt to +2.0ppt) as we believe PAVREIT should be traded at thinner spreads due to its asset stability while strong catalyst include expectations of asset injections in FY17. Due to these reasons, we believe PAVREIT warrants an OUTPERFORM call, while the stock is commanding attractive total returns of 16% at current levels.

Risks to our call include: (i) bond yield expansion vs. our target 10- year MGS yield, and (ii) weakening rental income.

Source: Kenanga Research - 28 Apr 2017