FY22 net profit of RM246.4m (+96% YoY) and DPU of 8.37 sen are slightly ahead of our expectations. Overall performance was lifted mainly by higher rental income and lower property operating expenses. We reaffirm our OUTPERFORM recommendation with a marginally higher TP of RM1.43 based on a target yield of 6.0% (which implies a 1.5% yield spread above our 10-year MGS assumption of 4.5%).

Slightly above our expectation but within consensus. FY22 core net profit (after adjusting for fair value changes on investment properties) stood at RM246.4m (+96% YoY), which is 6% ahead of our estimate but within the consensus number (by 5% higher). DPU of 2.21 sen in 4QFY22 was declared, bringing full-year DPU to 8.37 sen (versus our/consensus projections of 7.9 sen/7.8 sen).

Results’ highlights. YoY, on the back of gross revenue of RM569.7m (+17%), core net profit came in at RM246.4m (+96%), boosted by higher rental billings, increase in rental revenue and income from advertising and marketing events as well as lower property operating expenses (-18%, mainly due to the absence of pandemic rebates given to tenants previously). During the year, PAVREIT booked in fair value changes on investment properties amounting to RM151.4m, compared with FY21’s reduction of RM0.6m.

By property asset:- (i) Pavilion Kuala Lumpur Mall contributed the most with net property income (NPI) of RM316.4m (+49% YoY, representing 87% of total NPI last year), followed by (ii) Elite Pavilion Mall with a contribution of RM40.9m (+121% YoY or 11% of overall NPI). Separately, DA MEN Mall saw quarterly net property loss narrowing from RM2.7m in 3QFY22 to RM1.2m in 4QFY22, taking full-year net property loss to RM7.1m (versus FY21’s net loss of RM9.2m). Meanwhile, in 2022, PAVREIT achieved a positive rental reversion of 4%-5% for its overall portfolio of assets.

Outlook. As the base effect dissipates, forward earnings momentum is expected to normalise. Reflecting this, in 4QFY22, revenue came in at RM145.8m (+2% QoQ) while core net profit stood at RM65.0m (+6% QoQ). Yet, with shopping traffic now back to the pre-pandemic threshold, the anticipated pick-up in foreign tourist arrivals may mitigate any erosion of domestic consumer spending power amid the elevated inflationary environment and uncertain economic outlook.

Forecasts update. Post the results, we are setting our net profit projections at RM252.8m (+1.7) for FY23 and RM267.5m (new) for FY24. Correspondingly, our FY23F and FY24F gross DPU stand at 8.6 sen (+1.2) and 9.1 sen (new), which translate to yields of 6.4% and 6.7%, respectively.

OUTPERFORM call intact. We have tweaked our TP to RM1.43 (from RM1.42 previously), which is derived from a target yield of 6.0% on FY23F GDPU 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). Based on Tuesday’s closing price of RM1.35 (up 8.0% since our call upgrade to OUTPERFORM on 10 October 2022), the stock still has an upside potential of 5.9%. Including our FY23 projected dividend yield of 6.4%, PAVREIT currently offers expected total return of 12.3%, prompting us to maintain our OUTPERFORM call. 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 - 2 Feb 2023