9M18 realised net income (RNI) of RM188.4m came in well within our (75%) and consensus’ (72%) expectations. No dividends, as expected. Maintain FY18-19E CNP RM252- 267m. FY18-19 will see NLA expiries of 24-53% on modest single-digit reversions, while FY18 growth is also driven by the Elite Pavilion acquisition in 2Q18. Maintain MARKET PERFORM and TP of RM1.55.

9M18 realised net income (RNI) of RM188.4m came in well within our (75%) and consensus (72%) expectations. No dividend, as expected.

Results Highlights. YoY-Ytd, GRI was up by a solid 13% due to; (i) higher rental income from Pavilion Kuala Lumpur (PKL) after the repositioning exercise, (ii) higher occupancy at Intermark, and (iii) post the acquisition of Elite Pavilion Mall in April 2018 (2Q18), NPI margins improved by +2.3ppt although higher operating cost incurred for the new property and preventive maintenance works at Pavilion Kuala Lumpur Mall, but mitigated by lower electricity cost at DA MEN Mall. All in, RNI increased by 13%, despite the higher financing cost incurred for the Elite Pavilion Mall acquisition and working capital. QoQ, topline was up by 5% due to similar reasons mentioned above, and full quarter contributions post Elite Pavilion Mall’s acquisition. Similarly, borrowing cost increased post acquisition by 8%, on the back of higher operating cost (+6%) and expenditure (+1%). All in, RNI increased by 2%.

Outlook. FY18-19 will see 24-53% of portfolio NLA expiring, on single- digit reversions. Although lease expiries for FY19 appear lumpy, we are not overly concerned as the bulk is from PKL which should have no issue maintaining full occupancy on positive reversions given its strategic landmark positioning in KL. The acquisition of Elite Pavilion was completed on April 2018, funded by borrowings, which was a slightly accretive 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 single-digit rental reversions from lease expiries and the acquisition of Elite Pavilion Mall in 2Q18, 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 5.5-5.8% (net yields of 4.9-5.2%).

Maintain MARKET PERFORM and TP of RM1.55 based on FY19E GDPS/NDPS to 9.1 sen/8.2 sen and an unchanged gross yield spread of +1.6ppt to our 10-year MGS target of 4.20%. Our applied spread is +0.5SD above historical averages 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. However, note that our applied spread is on the thinner end among retail 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 decent gearing of 0.34x. Even so, PAVREIT commands a MARKET PERFORM call while FY19 gross yields of 5.8% are marginally lower vs. retail peers’ average of 6.0%.

Source: Kenanga Research - 26 Oct 2018