1Q18 realised net income (RNI) of RM65.3m came in well within our (26%) and consensus (25%) expectations. No dividends, as expected. Maintain FY18-19E CNP RM252- 267m. FY18-19 will see NLA expiries of 24-52% on modest single-digit reversions, while FY18 growth is also driven by the Elite Pavilion acquisition. Maintain OUTPERFORM and TP of RM1.55 on +1.6ppt spread the 10-year MGS target of 4.00%.

1Q18 realised net income (RNI) of RM65.3m came in within our (26%) and consensus (25%) expectations. No dividends, as expected.

Results Highlights. YoY-Ytd, GRI was up by a solid 11% due to higher rental income from Pavilion Kuala Lumpur (PKL) post the repositioning exercise and higher occupancy at Intermark Mall. This resulted in RNI increasing by 15% on slight RNI margin improvements due to minimal cost increases; (i) higher operating cost (+6%) on repairs and preventive maintenance works at Pavilion Kuala Lumpur Mall, (ii) higher expenditure (+6%), and (iii) higher financing cost (+7%) due to drawdown of additional borrowings for working capital and acquisitions. QoQ, top-line was up by 2% mainly from higher rental income from PKL mall. However, increased operating cost (+5%) due to similar reasons mentioned above, and slightly higher financing cost (+3%) caused RNI to be flat.

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 borrowings and we are mildly positive on the acquisition. 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 previously highlighted, we reckon PAVREIT could potentially acquire 3rd party assets from WCT (which owns Paradigm Mall and AEON Bukit Tinggi).

Maintain FY18-19E CNP of RM252-267m. 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 8.6-9.1 sen (NDPU of 7.8-8.2 sen), suggest gross yield of 6.0-6.3% (net yields of 5.4-5.7%).

Maintain OUTPERFORM and TP of RM1.55 based on FY18E GDPS/NDPS to 8.6 sen/7.8 sen and an unchanged spread of +1.6ppt to our 10-year MGS target of 4.00%. Our applied spread is +0.5SD above historical averages to encapsulate investors’ concerns of oversupply issues and OPR hikes but we may look to remove this going forward once confidence returns to MREITs’ valuations. Our applied spread is on the thinner end among MREITs under our coverage (of between +1.4ppt to +2.4ppt) which we believe is warranted given PAVREIT’s strong re-rating potential from possible asset injections, aided by its healthy balance sheet and low gearing of 0.27x. As such, we believe PAVREIT warrants an OUTPERFORM call backed by inorganic growth potential and decent gross yields of 6.0% vs. retail peers’ average of 6.1%.

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

Source: Kenanga Research - 27 Apr 2018