1Q19 realised net income (RNI) of RM69.2m came in well within our and consensus’ expectations at 26%, each. No dividends, as expected. Maintain FY19-20E CNP of RM267- 273m. FY19-20 will see NLA expiries of 56-22% on modest single-digit reversions. Maintain MP on an unchanged TP of RM1.70 as yield of 5.0% is comparatively close to peers’ average of 5.2%.

1Q19 realised net income (RNI) of RM69.2m came in well within our and consensus expectations at 26%, each. No dividends, as expected.

Results’ highlights. YoY-Ytd, top-line was up by a strong 15% on; (i) higher rental income from Pavilion Kuala Lumpur (PKL) after the repositioning exercise, and (ii) the inclusion of Elite Pavilion Mall (EPM) since April 2018 (2Q18). As for assets like Damen mall, it registered lower rental on slightly lower occupancy. All in, RNI grew at a slower pace of 6% compared to its revenue on: (i) higher operating cost (+16%) from utilities and from the new asset - EPM, and (ii) steeper financing cost (+45%) from additional borrowings incurred to acquire EPM and for working capital. QoQ, top-line was up by 3% supported by PKL’s positive rental reversions and stable occupancy, despite marginally lower rental at other malls from lower advertising income and repositioning of tenants. Positively, lower expenditure (-17%), and slightly lower borrowing cost (-1%) allowed RNI to increase by 4%.

Outlook. FY19-20 will see 56-22% of portfolio NLA expiring, on single- digit reversions. Despite FY19 being a major lease expiry year, we are not overly concerned as the bulk of expiries are from PKL which should have no issue maintaining full occupancy on positive reversions given its strategic location in KL. 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 FY19-20E CNP of RM267-273m. FY19 growth will be driven by inorganic growth from the acquisition of EPM which was completed in 2Q18, and single-digit rental reversions. Meanwhile FY20 will be driven by organic growth for now. Our FY19-20E GDPU of 9.1-9.3 sen (NDPU of 8.2-8.4 sen) suggest gross yield of 5.0-5.1% (net yield of 4.5- 4.6%).

Maintain MARKET PERFORM on an unchanged TP of RM1.70 based on FY19E GDPS/NDPS to 9.1 sen/8.2 sen and an unchanged gross yield spread of +1.5ppt to our 10-year MGS target of 3.90%. We like PAVREIT for its high-quality asset profile (namely PKL, which contributes 80% to top-line) and resilient earnings and as such believe our call is justified as most upsides have been priced in (i.e. positive reversions and stable portfolio occupancy), while downside risks appear limited at this juncture. At current levels, PAVREIT’s FY19 gross yield of 5.0% is trading close to MREIT peers’ average of 5.2%.

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

Source: Kenanga Research - 26 Apr 2019