9MFY22 net profit of RM181.4m (+153% YoY) and DPU of 6.16 sen are broadly within our full-year expectations. The improved performance was driven mainly by higher rental income and lower property operating expenses. Our earnings forecasts are maintained as we anticipate a slightly slower final quarter. Reiterate our OUTPERFORM recommendation with an unchanged 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%).

Broadly in-line with expectations. 9MFY22 net profit stood at RM181.4m (up 153% YoY), representing 78%/79% of our/consensus full-year estimate as we anticipate a marginally slower 4QFY22 performance. DPU of 2.08 sen in 3QFY22 took YTD DPU to 6.16 sen (or 78% of our full-year estimate).

Results’ highlights. YoY, net profit jumped 153% to RM181.4m as gross revenue grew 16% to RM423.9m in 9MFY22. The overall performance was lifted by a stronger topline (on account of higher revenue rent and income from advertising and marketing events) as well as lower property operating expenses (-26%, mainly attributable to the absence of pandemic rebates given to tenants previously) following a return to normalcy post the Covid-19 disruptions.

Cumulatively, Pavilion Kuala Lumpur Mall was the top contributor with net property income (NPI) of RM233.2m (+63% YoY), making up 87% of total NPI in the first nine months of 2022. This was followed by Elite Pavilion Mall, which contributed RM30.3m (+235% YoY) (or 11% of overall NPI). Meanwhile, DA MEN Mall logged narrower net property loss of RM2.7m in 3QFY22 (a slight improvement when compared with the net losses of RM2.9m in 2QFY22 and RM3.2m in 3QFY21), bringing its YTD net property loss to RM5.9m (versus a net loss of RM8.1m in 9MFY21).

Outlook. 4QFY22 earnings growth momentum is expected to normalise in the absence of base effect (recall that PAVREIT started to show earnings rebound in 4QFY21 following the post Covid-19 transition into Phase 4 of the national recovery plan on 18 October 2021). While its outlook may continue to be supported by the upcoming year-end festive mood, the final quarter performance may yet be clouded by cautious discretionary spending amid the elevated inflationary environment and economic recession worry.

Keeping our forecasts. Post the 9MFY22 results, our net profit forecasts have been maintained at RM232.7m for FY22 and RM248.5m for FY23. There is also no change to our FY22F and FY23F gross DPU at 7.9 sen and 8.5 sen, translating to yields of 6.3% and 6.8%, respectively.

OUTPERFORM call. This is based on our unchanged TP of RM1.42, which is derived from a target yield of 6.0% after applying a 1.5% yield spread above our 10-year MGS assumption of 4.5% (to reflect its prime asset portfolio as anchored by Pavilion Kuala Lumpur Mall and Elite Pavilion Mall), representing an upside potential of 13.6%. Together with projected dividend yield of 6.8% for FY23, the stock offers expected total return of 20.4% as value has emerged following its share price decline from RM1.41 in May this year to close at RM1.25 yesterday. There is no adjustment to our TP based on ESG which is given a 3-star rating as appraised by us.

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

Source: Kenanga Research - 28 Oct 2022