FY18 realised net income (RNI) of RM255.1m came in well within our (101%) and consensus’ (100%) expectations. FY18 dividend was also within at 102%. Maintain FY19E CNP of RM267m and introduce FY20E numbers. FY19-20 will see NLA expiries of 56-22% on modest single-digit reversions. Downgrade to UP (from MP) on an unchanged TP of RM1.55 due to steep valuations.

FY18 realised net income (RNI) of RM255.1m came in well within our (101%) and consensus (100%) expectations. An interim dividend of 4.44 sen per unit was declared (which includes a non-taxable portion of 0.18 sen), bringing FY18 GDPU to 8.78 sen which is also within our expectation at 102% of our estimate of 8.60 sen (5.0% gross dividend yield).

Results Highlights. YoY-Ytd, top-line was up by a commendable 13% on; (i) higher rental income from Pavilion Kuala Lumpur (PKL) after the repositioning exercise, (ii) higher rental and occupancy at Intermark, and (iii) post the acquisition of Elite Pavilion Mall in April 2018 (2Q18), but mildly offset by lower rental at Damen mall on the back of slightly lower occupancy. However, the positive top-line growth trickled to RNI growth of 10% on higher financing cost (+38%) incurred for the Elite Pavilion Mall acquisition and working capital. QoQ, top-line was up by 4% due to similar reasons mentioned above. However, marginally lower operating cost (-2%) due to lower maintenance expenses, and flattish borrowing cost allowed RNI to increase by 7%.

Outlook. FY19-20 will see 56-22% 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, completed on April 2018, funded by borrowings, was a mildly 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 FY19E CNP of RM267m and introduce FY20E CNP of RM273m. FY19 growth will be driven by single-digit rental reversions from lease expiries as well as full-year contributions from the acquisition of Elite Pavilion Mall in 2Q18, while FY20 will be driven by organic growth. Our FY19-20E GDPU of 9.1-9.3 sen (NDPU of 8.2-8.4 sen), suggest gross yields of 5.2-5.3% (net yields of 4.7-4.8%).

Downgrade to UNDERPERFORM (from MP) on an unchanged 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%. We like PAVREIT for its high-quality asset profile (namely PKL, which contributes 80% of topline) on its earnings resiliency, and as such our applied spread is on the lower end of amongst MREITs under our coverage (+1.4ppt to 3.3ppt). However, even at such thin spreads, we believe PAVREIT’s valuations are exhausted at current levels with FY19 gross yield of 5.2%, which is well below MREIT peers’ average of 5.9%.

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

Source: Kenanga Research - 30 Jan 2019