PAVREIT’s FY23 results met expectations with a notable pick-up in occupancy rates as more tenants could be encouraged by a return in overall consumer spending appetite. We introduce our FY25F numbers to which we roll over our valuations, leading to a higher TP of RM1.51 (from RM1.47). Maintain OUTPERFORM call. PAVREIT is our top pick for amongst REITs under coverage for its resilience.

Within expectations. PAVREIT’s FY23 core net profit of RM285.3m made up 100% of our full-year forecast and 101% of consensus fullyear estimate. A final distribution per unit of 4.6 sen totals up to 9.01 sen for FY23, which we deem within our expectations.

YoY, its FY23 gross revenue increased by 29% from improved rentals across the board but mainly from the inclusion of Pavilion Bukit Jalil Mall. Pavilion KL remained as the leading contributor of net property income at RM353.7m, or 77% of FY23’s total income. Meanwhile, Pavilion Bukit Jalil contributed RM52.5m or 12% since its inclusion in 2QFY23. Net property income margin saw a decline to 63.4% (-1.5ppt) on higher utilities and maintenance expenses. Additionally, borrowing costs rose by 57% from substantial drawdowns to fund acquisitions, coupled with a rising rate environment. All in, FY23 core net profit still grew by 16% to RM285.3m after adjustments for fair value gains.

Outlook. PAVREIT’s assets appear to be enjoying a reinvigoration as we noted higher reported tenancy ratios, supported by encouraging footfalls. Pavilion KL closed with 95% occupancy (from Dec 2022: 92%), Intermark Mall at 90% (from 87%) with even DA MEN Mall reporting favourably at 73% (from 65%). It is noted that Pavilion Bukit Jalil reported an occupancy rate of 88%. Creeping into end-CY24 to CY25, the group may enjoy greater rental reversions in accordance to the expiry of most tenancy schedules. That said, we hold our breath for a meaningful increase in rental rates as it could be fluid in accordance to market conditions, which we anticipate could face resistance in the near term, no thanks to the implementation of new taxes and targeted subsidies. On the flipside, we are encouraged by PAVREIT’s rights of first refusal granted for the possible acquisition of fahrenheit88 mall which is directly opposite its key Pavilion KL asset.

Forecasts. Post results, our FY24F earnings is tweaked by -1% as we incorporate FY23 full-year numbers. Meanwhile, we introduce our FY25F earnings which forecast a modest earnings increase of 4% as tenancy levels and rental rates may remain stable in the medium term.

Valuations. We raise our TP to RM1.51 (from RM1.47) as we roll over our valuation base year to FY25F with a DPU of 9.1 sen. This is against an unchanged target yield of 6.0% (derived from a 2.0% yield spread above our 10-year MGS assumption of 4.0%). The low yield spread is to reflect its prime asset portfolio as anchored by Pavilion KL and Pavilion Bukit Jalil.

Investment case. We believe PAVREIT’s premium retail assets are less vulnerable to downward pressure on occupancy and rental rates amidst rising headwinds in the retail sector on the back of sustained high inflation that hurts consumer spending. There is no adjustment to our TP based on ESG which is given a 3-star rating as appraised by us (see Page 4). Maintain OUTPERFORM.

Risks to our call include: (i) rising risk-free rate, (ii) lower-than-expected rental reversions, (iii) weaker-than-expected occupancy rates; and (iv) loss of footfall to new rival malls.

Source: Kenanga Research - 26 Jan 2024