1H18 realised net income (RNI) of RM126.2m came in well within our (50%) and consensus (48%) expectations. 1H18 GDPU of 4.34 sen was also within (50%). Maintain FY18-19E CNP of RM252-267m. FY18-19 will see NLA expiries of 24- 53% on modest single-digit reversions, while FY18 growth is driven by the Elite Pavilion acquisition in 2Q18. Maintain MARKET PERFORM and TP of RM1.50 on +1.6ppt spread to the 10-year MGS target of 4.20%. 1H18 realised net income (RNI) of RM126.2m came in within our (50%) and consensus (48%) expectations. 1H18 GDPU of 4.34 sen per unit (which includes a non-taxable portion of 0.16 sen) was also within expectation at 50% of our FY18E GDPU of 8.6 sen (5.2% gross dividend yield).

Results Highlights. YoY-Ytd, GRI was up by a solid 11% due to higher rental income from: (i) Pavilion Kuala Lumpur (PKL) after the repositioning exercise, (ii) higher occupancy at Intermark, and (iii) post the acquisition of Elite Pavilion Mall in 2Q18. NPI margin managed to improve by 2ppt despite marginally higher costs from Elite Pavilion Mall and preventive maintenance works at PKL. All in, RNI increased by 13% despite higher; (i) expenditure and (ii) financing cost (+25%) from the acquisition of the new property. QoQ, top-line was up by 3% from the acquisition of Elite Pavilion Mall in 2Q18, but marginally offset by weaker contribution from PKL likely from lower turnover rent as 2Q is seasonally a weaker quarter. NPI margins were flattish, but bottom-line was dragged down by higher expenditure (+6%) and financing cost (+35%) due to similar reasons mentioned above.

Outlook. FY18-19 will see 24-53% of portfolio NLA expiring, on single- digit reversions. Although lease expiries in end FY19 appear lumpy, we are not overly concerned as the bulk of those expiries are from PKL, which should have no issue maintaining full occupancy on decent reversions. The acquisition of Elite Pavilion was completed on April 2018, 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 the 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 5.2-5.5% (net yields of 4.7-5.0%).

Maintain MARKET PERFORM and TP of RM1.50 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 4.20%. Our applied spread is +0.5SD above historical average to serve as a buffer for near-term fluctuations to the MGS on oversupply issues and interest rate hikes, but we may look to remove this going forward once confidence returns to MREITs’ valuations. Note that 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 0.34x. Even so, PAVREIT commands a MARKET PERFORM call with gross yield of 5.2% that are marginally lower vs. retail peers’ average of 5.6%.

Source: Kenanga Research - 27 Jul 2018