1QFY22 realised net income (RNI) of RM65.2m came in above ours and consensus expectations at 32% and at 33% as rental revenue was stronger than expected post the reopening of the economy. No dividends, as expected. Increase FY22-23E CNP by 20-19% to RM241-246m. Upgrade to OUTPERFORM (from MP) with a higher TP of RM1.45 (from RM1.25) on higher earnings and post rolling valuation base forward to FY23E, but on a higher 10-year MGS target of 4.15% (from 3.90%).

1QFY22 realised net income (RNI) of RM65.2m came in above our expectation (32%) and consensus (33%) as 1QFY22 earnings were stronger than expected with the reopening of the economy. No dividends, as expected.

Results’ highlights. QoQ, top-line was up by 12% on higher rental income in tandem with the reopening of the economy and less rental incentives. All in RNI was up by 20%. YoY-Ytd, top-line was up by 10% due to similar reasons mentioned above. However, margins improved to 47% (from 25%) in line with less rental incentives. All in, RNI was up by 109%. Gearing remained flat at low level of 0.35x.

Outlook. FY22 is a major lease expiry year for the group with up to 55% of NLA up for expiry. We are optimistic that PAVREIT would benefit from the reopening of the economy given its positive track record and strong rebound since the economy reopened over the last two quarters, benefitting from increased shopper traffic and strong tenants’ sales, but we also remain cautious on strong rental reversions this year. We will continue to monitor the situation more closely as disruptions to economic activity from a pandemic resurgence could bode negatively for the Group.

Increase FY22-23E by 20-19% to RM241-246m. We expect the earnings growth in FY22-23 from less rental incentives and positive low single-digit reversions. Our FY22-23E GDPU of 8.2-8.4 sen (NDPU of 7.4-7.6 sen) imply gross yield of 6.3-6.5% (net yield of 5.7-5.8%).

Upgrade to OUTPERFORM (from MARKET PERFORM) with a higher TP of RM1.45 (from RM1.25) as we upgrade our earnings and roll forward our valuation base to FY23E GDPS/NDPS of 8.4 sen/7.6 sen and attach 1.6ppt (at +0.5SD) to a higher 10-year MGS target yield of 4.15% (from 3.90%). We remain cautiously optimistic and have priced such sentiment into our conservative earnings and valuations, but even so, PAVREIT warrants an OP at current levels with 6.5% gross yields vs. peers average of 5.7%

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

Source: Kenanga Research - 29 Apr 2022