9MFY19 realised net income (RNI) of RM187.9m came in within our target at 70%, but slightly below consensus’ expectation at 69%. 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 MARKET PERFORM and TP of RM1.90.

9MFY19 realised net income (RNI) of RM187.9m came in within our expectation at 70%, but slightly below consensus at 69%. The reason for the deviation with consensus estimates is due to bullish RNI margin of 45% (vs. 41% for 9MFY19) likely due to low financing cost estimates, as top-line came in within (at 74%). No dividends, as expected.

Results’ highlights. YoY-Ytd, top-line was up by a strong 8% driven by: (i) higher rental income from Pavilion Kuala Lumpur (PKL) post the repositioning exercise, and (ii) the inclusion of Elite Pavilion Mall (EPM) in April 2018 (2Q18). Top-line growth was mildly dampened by Damen mall which registered lower rental on slightly lower occupancy. However, RNI was flat due to operating cost (+16%), higher financing cost (+14%) and higher expenditure (+5%) from the recent acquisition.

QoQ, top-line was flat, likely due to seasonal factors as 2Q-3Q are seasonally weaker. This cascaded straight to bottom-line as RNI was flat (0%) on a mild increase in operating cost (+1%) but was offset by slightly lower financing cost (-2%).

Outlook. FY19-20 will see 56-22% of portfolio NLA expiring, on singledigit reversions. FY19 is a major lease expiry year but we are not overly concerned as the bulk of expiries are from PKL which we are confident will maintain full occupancy on positive reversions as seen in recent result trends, 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%.

Earnings unchanged. Maintain FY19-20E CNP of RM267-273m with FY19 to be driven by the acquisition of EPM which was completed in 2QCY18, and single-digit rental reversions for the portfolio mainly from PKL, 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) implies gross yield of 5.1-5.2% (net yield of 4.6-4.7%).

Maintain MARKET PERFORM and TP of RM1.90 on FY20E GDPS/NDPS 9.3 sen/8.4 sen and an unchanged gross yield spread of +1.5ppt to our 10-year MGS target of 3.40%. We like PAVREIT for its prime asset profile which is mainly dependent on PKL which contributes c.80% to top-line, and resilient earnings and as such have applied thin spreads which are at the lower-end among retail MREITs under our coverage (between +1.3ppt to +2.6ppt). We are comfortable with our call as most upsides have been priced in (i.e. positive reversions and stable portfolio occupancy), while downside risks appear limited at this juncture. Furthermore, FY20E gross yield of 5.2% is trading close to comparable MREIT peers’ average of 5.4%.

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 - 25 Oct 2019