1QFY23 net profit of RM70.1m (+7% YoY) and DPU of 2.37 sen are marginally ahead of our full-year expectations. We reiterate our OUTPERFORM call with a slightly higher TP of RM1.47 based on a target yield of 6.0% (which implies a 1.5% yield spread above our 10-year MGS yield assumption of 4.5%) as we impute contributions from PBJ Mall and roll over our valuation window.

Slightly above expectations. 1QFY23 core net profit of RM70.1m (+7% YoY) represented 28%/26% of our/consensus full-year estimates. DPU of 2.37 sen is marginally ahead of our FY23 forecast of 8.6 sen.

Results’ highlights. YoY, gross revenue was up 16% to RM156.4m (lifted by higher rental and advertising & marketing event incomes) while property operating expenses climbed 34% to RM54.3m mainly due to higher electricity tariff, no recovery of doubtful debts (previously recognised in 1QFY22) and marketing campaigns cost for Chinese New Year festival and Pavilion Kuala Lumpur Mall (PKL Mall)’s 15th anniversary. Consequently, core net profit came in at RM70.1m (+7%).

By property asset: (i) PKL Mall contributed net property income (NPI) of RM91.4m (+14% YoY, accounting for 90% of total NPI), and (ii) Elite Pavilion Mall (EPM) made NPI of RM9.9m (+2% YoY or 10% of overall NPI). DA MEN Mall posted net property loss of RM2.5m in 1QFY23 (vs. net property loss of RM2.7m in 3QFY22 and RM1.2m in 4QFY22).

PBJ Mall acquisition on track. PAVREIT is on track to add Pavilion Bukit Jalil (PBJ Mall) to its portfolio of investment properties. Following its first announcement on 22 November last year, it has recently secured approval from unitholders (on 22 March) and would be undertaking a placement exercise to part finance the acquisition price. Recall that PAVREIT has agreed to buy PBJ Mall in a related party transaction for an aggregate purchase consideration of RM2.2b to be funded by a mixture of new equity capital (via a 2-tranche private placement exercise) and bank borrowings.

According to a circular to unitholders dated 7 March 2023, PBJ Mall recorded an unaudited NPI of RM75.4m since its opening on 3 December 2021 until 31 December 2022 (excluding the opening incentive and rebate to tenants). Post the acquisition, we are projecting that PBJ Mall will rake in NPI of RM53m (half-year contribution; based on an occupancy rate of 85%) in FY23 and RM118m (based on an occupancy rate of 90%) in FY24.

Forecasts update. After factoring in contributions from PBJ Mall and fine-tuning the latest figures from the results, we have set our net profit forecasts at RM284.2m (+12.4%) for FY23 and RM347.1m (+29.8%) for FY24. Imputing an enlarged number of units of 4,058.8m (+33% from its existing base) post the private placement exercise (assumed at an issue price of RM1.27), this brings our FY23/FY24 gross DPU to 8.2 sen (from 8.6 sen) and 8.8 sen (from 9.1 sen), which imply yields of 6.3% and 6.5%, respectively.

OUTPERFORM call intact. We have adjusted our TP to RM1.47 (from RM1.43 previously) based on a target yield of 6.0% on FY24F GDPU after applying a 1.5% yield spread above our 10-year MGS yield assumption of 4.5% as we roll over our valuation window. This is to reflect its prime asset portfolio as anchored by PKL Mall and EPM. Including our FY23F dividend yield of 6.3%, PAVREIT offers an expected total return of 19.4%, 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-thanexpected rental reversions, and (iii) lower-than-expected occupancy rates.

Source: Kenanga Research - 25 Apr 2023