FY17 realised net income (RNI) of RM232.4m came in within our (98%) and consensus expectations (95%). FY17 GDPU of 8.24 sen was also within (101%). Maintain FY18E CNP of RM279.8m and introduce FY19E CNP of RM283.3m. FY18-19 will see NLA expiries of 24-52% on modest single-digit reversions, while FY18 growth is mostly driven by the Elite Pavilion acquisition. Maintain OUTPERFORM and TP of RM1.84 on +0.8ppt spread the 10-year MGS target of 4.00%.

FY17 realised net income (RNI) of RM232.4 came in within our (98%) and consensus (95%) expectations. An interim dividend of 4.28 sen was declared (which includes a 0.13 sen non-taxable portion, bringing FY17 GDPU to 8.24 sen, which is well within our expectation, making up 101% of our FY17E GDPU of 8.10 sen.

Results Highlights. YoY-Ytd, GRI was up 7% on; (i) repositioning of tenants at Pavilion KL (PKL) on the back of positive mid to single-digit rental reversions, (ii) full-year contributions from Damen Mall and Intermark Mall (completed in Mar 2016), and (iii) electricity collection fees from Damen Mall. However, RNI declined by 1%, weighed down by; (i) higher operating cost (+15%) from maintenance at Pavilion Kuala Lumpur (PKL) and Intermark Mall, tenancy cost at Damen Mall, provision of doubtful debts, and marketing cost incurred for sponsorship of 2017 Sea Games, and (ii) increased financing cost (+16%) for the acquisition of the new malls. QoQ, 4Q17 revenue was up by 7% on tenant repositioning at Pavilion KL (PKL), higher advertising income as well as fees from Damen’s electricity provider. However, operating cost declined (-6%) as the bulk of the abovementioned cost was incurred in 2Q-3Q17, while financing cost remained flattish. This allowed bottom- line to increase by 18%.

Outlook. FY18-19 will see 24-52% of portfolio NLA expiring, on single- digit reversions. Although lease expiries in FY19 appear lumpy, we are not overly concerned as the bulk is from PKL, which should have no issue maintaining full occupancy on decent reversions. The proposed acquisition of Elite Pavilion is expected to be completed in FY18 and will be funded by a combination of borrowings and 7.2% placement. We are positive on this acquisition as it contributes c.8% to FY18E earnings, and 7.6% to DPU (post placement). Fahrenheit88 acquisition is still on the table, pending the sponsor’s intention to sell, while we believe PAVREIT is eyeing cap rates closer to 6.5%. Additionally, as we had previously highlighted, we reckon PAVREIT could potentially acquire 3rd party assets from WCT (which owns Paradigm Mall and AEON Bukit Tinggi).

Maintain FY18E CNP of RM279.8m and introduce FY19E CNP of RM283.3m. FY18 growth will be driven by the acquisition of Elite Pavilion and single-digit rental reversions from lease expiries, while FY19 will be driven by organic growth. Our FY18-19E GDPU of 8.9-9.0 sen (NDPU of 8.0-8.1 sen), suggest gross yields of 5.8-5.8% (net yields of 5.2-5.2%).

Maintain OUTPERFORM and TP of RM1.84 based on FY18E GDPS/NDPS to 8.9 sen/8.0 sen and an unchanged spread of +0.8ppt to our 10-year MGS target of 4.00%. We have applied the thinnest yield spread among MREITs under our coverage (between +0.8ppt to +2.1ppt) as we believe PAVREIT deserves thinner spreads on strong re-rating potential from possible asset injections, aided by its healthy balance sheet and low gearing of 0.26x. As such, we believe PAVREIT warrants an OUTPERFORM call on decent gross/net yields of 5.7%/5.2% and inorganic growth potential.

Source: Kenanga Research - 26 Jan 2018