PAVREIT’s 1HFY23 core net profit and distribution were within expectations. The addition of Pavilion Bukit Jalil to its portfolio could serve as a meaningful contributor to the group, albeit with a higher borrowing cost attached. Maintain OP and TP of RM1.47 at a target yield of 6.0%.

Within expectations. 1HFY23 net profit of RM132.9m was within expectations, accounting for 47% of both our full-year forecast and consensus full-year estimate. A distribution per unit of 0.76 sen (YTD: 4.41 sen) is also within expectations.

YoY, 1HFY23 gross revenue jumped 18% with the net property income (NPI) rising by 15% as its business benefited from shopper traffic stabilising post-pandemic. Cumulatively, Pavilion KL was the top contributor with NPI of RM173.7m, making up 86% of total NPI in 6MFY23. This was followed by Elite Pavilion Mall, which contributed RM20.2m. Non-operating cost rose by 27%, mainly led by higher borrowings. Notably, QoQ borrowing cost also saw an increase of 83%, which we believe is mainly caused by heightened borrowings booked in 2QFY23 as the group completed its acquisition of Pavilion Bukit Jalil in June 2023. Overall, this diminished 1HFY23’s profitability but still translated to a distributable income and core net profit of RM139.4m (+12%) and RM132.9m (+11%), respectively.

Outlook. The group’s key assets in Pavilion KL are expected to experience encouraging occupancy rates (c.95%) as its prime location is highly desired by upmarket retailers. However, occupancy numbers may see a slight bump in the near term following the relocation of certain high-profile tenants. Meanwhile, Pavilion Bukit Jalil is now an active asset in PAVREIT’s portfolio, with tenancy ratio progressively picking up to c.85%. We anticipate this to be its recent high since its launch in late 2021. Meanwhile, the group’s sole loss-making asset, Da Men Mall, is being closely tracked with strong efforts to raise its tenancy ratio closer to 80%, which could be its breakeven point from 72% at present. The group hopes to achieve this by 2025 with a possible rebranding of the mall to refresh its image.

Forecasts. Post-results, we maintain our FY23F/FY24F earnings.

Maintain OUTPERFORM and TP of RM1.47. Our TP is based on our FY24F gross DPU of 8.8 sen against an unchanged target yield of 6.0% (derived from a 1.5% yield spread above our 10-year MGS assumption of 4.5%). The low yield spread is to reflect its prime asset portfolio as anchored by Pavilion KL and Elite Pavilion Mall. We believe the current share price reflects an underappreciation of its portfolio of premium retail assets, where we reckon consumer spending could be less susceptible to inflationary headwinds 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) higher/lower than-expected rental reversions, and (iii) higher-than-expected occupancy rates.

Source: Kenanga Research - 28 Jul 2023