1H19 realised net income (RNI) of RM128.5m came in well within our and consensus expectations at 48% and 47%, respectively. 1H19 dividend of 4.40 sen is also within expectation (at 48%). Maintain FY19-20E CNP of RM267- 273m. FY19-20 will see NLA expiries of 56-22% on modest single-digit reversions. Maintain MP on a slightly higher TP of RM1.80 (from RM1.75) post rolling valuation to FY20E.

1H19 realised net income (RNI) of RM128.5m came in well within our and consensus expectations at 48% and 47%, respectively. 1H19 dividend of 4.40 sen (which includes a non-taxable portion of 0.19 sen), was also well within our expectation of 9.10 sen for FY19 (48%), implying 4.8% gross yield.

Results’ highlights. YoY-Ytd, top-line was up by a solid 11% 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). This, however, was partially offset by Damen Mall, which registered lower rental on slightly lower occupancy. Higher financing cost (+24%) and expenditure (+8%) from the recent acquisitions caused RNI to grow at a slower pace of 2%. QoQ, top-line was down by 5% due to seasonally lower contributions from both PKL and Intermark Mall as 2Q is seasonally a weaker quarter. This coupled with weaker NPI margins, likely due to higher marketing and promotional expenses, resulted in RNI declining by 14%.

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%.

Maintain FY19-20E CNP of RM267-273m. FY19 growth will be driven by the acquisition of EPM, which was completed in 2Q18, and single digit rental reversions for the portfolio. Meanwhile, FY20 will be driven by organic growth. Our FY19-20E GDPU of 9.1-9.3 sen (NDPU of 8.2- 8.4 sen) imply gross yield of 4.8-4.9% (net yield of 4.3-4.4%).

Maintain MARKET PERFORM but increase Target Price to RM1.80 (from RM1.75) post rolling forward valuation base to FY20E GDPS/NDPS of 9.3 sen/8.4 sen (from FY19E GDPS/NDPS of 9.1 sen/8.2 sen) and an unchanged gross yield spread of +1.5ppt to our 10-year MGS target of 3.70%. We like PAVREIT for its prime asset profile (namely PKL, which contributes c.80% to top-line) and resilient earnings and as such have applied thin spreads, which are on the lower-end among retail MREITs under our coverage (between +1.3ppt to +2.4ppt). That said, we 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. FY20E gross yield of 4.9% is below comparable MREIT peers’ average of 5.1%.

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 Jul 2019