1HFY20 realised net income (RNI) of RM44.6m (-31% YoY Ytd) came in broadly within our and consensus expectations at 29% and 25%, respectively on expectations of better earnings in 2H post various MCO phases in 1H20. 1H20 dividends of 1.61 sen is also broadly within (30%). Maintain FY20-21E CNP of RM152-242m. Maintain MARKET PERFORM and TP of RM1.50.

1HFY20 realised net income (RNI) of RM44.6m came in broadly within our and consensus expectation at 29% and 25%, respectively as we expect a stronger 2H20 given the MCO phases which affected mostly 2Q20. 1H20 dividend of 1.61 sen (which includes a non-taxable portion of 0.12 sen) was also broadly within our expectations of 5.30 sen in FY19E (30%), implying 3.3% gross yields.

Results’ highlights. YoY-Ytd, top-line was down by 31% on weakness from all assets due to rental rebates to non-essential tenants during the MCO phases. As a result, RNI declined by 65% despite lower financing cost (-7%) and expenditure (-17%). QoQ, topline was down by 25% given rental rebates in both 1Q and 2Q. This trickled straight to bottomline which declined by 71% while RNI margins were also weaker by 18.2ppt despite lower financing cost (-6%) and expenditure (-9%).

Outlook. FY20-21 will see minimal expiries of 22-19% of portfolio NLA expiring. We expect conditions at Damen mall to remain challenging in the near term given the on-going pandemic.

Maintain FY20-21E CNP of RM152-242m on flattish to marginally declining reversions, coupled with rental waivers for certain tenants. Occupancy is expected to remain fairly stable for now at c.90% as mall operators would prefer to prioritise occupancy over reversion. Our FY20-21E GDPU of 5.3-8.3 sen (NDPU of 4.8-7.4 sen) implies gross yield of 3.2-5.2% (net yield of 3.0-4.6%).

Maintain MARKET PERFORM and TP of RM1.50. Our TP is based on FY21E GDPS/NDPS to 8.3 sen/7.4 sen and a +2.3ppt (@ +2SD) to our 10-year MGS target of 3.30%. We remain cautious on pure retail MREITs as earnings continued to be hit during the Covid-19 pandemic and may prolong should there be another rise in cases or as shoppers adjust to the new normal. We are comfortable with our call as most foreseeable downsides have been priced in for now given that the situation is ongoing. At current levels, PAVREIT is commanding 5.2% gross yield for FY21 which is on par with its 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 - 24 Jul 2020