2QFY22 net profit of RM55.0m (+169% YoY) took 1HFY22 net profit to RM120.2m (+133% YoY), which is slightly below our expectation. DPU of 1.87 sen (in 2QFY22) and 4.08 sen (in 1HFY22) are marginally under our FY22E DPU of 8.2 sen. We adjust our forward earnings by -3.5% for FY22 and +0.9% for FY23. Maintain MARKET PERFORM with a revised TP of RM1.42 based on a target yield of 6.0% (which implies a 1.5% yield spread above our 10-year MGS assumption of 4.5%). There is no adjustment to our TP based on ESG for which it is given a 3-star rating as appraised by us.

Slightly behind our expectation with 1HFY22 net profit of RM120.2m (up 133% YoY) accounting for 50% of our full-year projection (but slightly ahead of consensus at 54%) as we anticipate a marginally slower second half. DPU of 1.87 sen for 2QFY22 was declared, taking 1HFY22 DPU to 4.08 sen (or 50% of our full-year estimate).

Results’ highlights. YoY, net profit surged 169% to RM55.0m on the back of a 13% jump in gross revenue to RM141.5m following a 10% rebound in rental income from 2QFY21 (which was then marred by the Covid-19 disruptions). QoQ, topline was broadly flat (+2%) but net profit slipped (-16%) as net property income declined 12% from RM94.0m to RM83.1m, attributable to a 30% increase in “other operating expenses” (mainly because of higher upkeeping costs that were previously deferred). Cumulatively, 1HFY22 net profit jumped 133% YoY to RM120.2m as gross revenue increased 12% to RM280.3m, lifted by better net property income (of RM177.1m versus RM106.5m previously). The key profit generator was Pavilion Kuala Lumpur Mall, which contributed RM154.4m or 87% of total net property income in the first half.

Outlook. The company indicated that shopping traffic at its prime malls is now approximately 85% of the pre-pandemic level. While the positive momentum from 1HFY22 will likely continue with the resumption of economic activities, business sentiment may turn cautious ahead in view of the rising inflationary environment and possible recession fears. Within its asset portfolio, Pavilion Kuala Lumpur Mall and Elite Pavilion Mall have seen high occupancy rates (of 89.7% and 86.7%, respectively, as of end-June 2022), which are expected to climb further by year-end following the repositioning of new/existing tenants amid ongoing rental renewal negotiations. As for loss-making DA MEN Mall (which incurred net property loss of RM3.2m in 1HFY22), we gather that its occupancy rate may rise from 58.8% at end-June to slightly above 70% by year-end as PAVREIT is targeting this property to break even next year before turning profitable in 2023.

Tweaking our forecasts. Following the 1HFY22 results, our net profit forecasts have been adjusted to RM232.7m (-3.4%) for FY22 and RM248.5m (+0.9) for FY23 after tweaking our operating cost assumptions. Correspondingly, our FY22-FY23 gross DPU are now projected at 7.9 sen (from 8.2 sen) and 8.5 sen (from 8.4 sen), respectively, which imply yields of 5.9%-6.4%.

Still MARKET PERFORM. We have revised our TP to RM1.42 (from RM1.30) based on a target yield of 6.0% (which is derived from a 1.5% yield spread above our 10-year MGS assumption of 4.5%). This reflects PAVREIT’s prime asset portfolio (as anchored by Pavilion Kuala Lumpur Mall and Elite Pavilion Mall) while it will take time for other assets such as DA MEN Mall to make meaningful contributions against the competitive retail industry backdrop.

Risks to our call include: (i) bond yield contraction/expansion, (ii) higher/lower-than-expected rental reversions, and (iii) higher/lower-than-expected occupancy rates.

Source: Kenanga Research - 29 Jul 2022