PAVREIT’s 1QFY24 results met expectations. Its 1HFY24 core net profit soared 33% YoY driven largely by contribution from new asset Pavilion Bukit Jalil. Its core shopping malls in KL city centre held up relatively well despite competition from the new TRX mall. We keep our forecasts, TP of RM1.59 and OUTPERFORM call.

PAVREIT’s 1HFY24 core net profit of RM150.3m made up 44% and 43% of our full-year forecast and the full-year consensus estimate, respectively. However, we consider the result as within expectations as we expect stronger performance in 2HFY24 driven by the year-end shopping season. It announced an estimated net income distribution of 4.1 sen, on track to meet our full-year forecast of 9.5 sen.

YoY, its 1HFY24 revenue soared by 33% driven by: (i) contribution from its new asset Pavilion Bukit Jalil of which acquisition was completed in June 2023, and (ii) positive rental reversions. However, its core net profit only grew by 13% mainly attributed to increased upkeep and utilities costs with higher financing costs arising from additional borrowings to fund the acquisition of Pavilion Bukit Jalil.

QoQ, its 2QFY34 revenue dropped by 7% due to the high base in the preceding quarter on pre-Hari Raya shopping. Its core net profit fell by a sharper 19% as operating costs did not ease correspondingly.

Outlook. PAVREIT’s assets in the KL city centre, i.e. Pavilion KL and Elite Pavilion Mall, have been able to consistently chalk up higher occupancy despite the entry of TRX mall. On one hand, we are mindful of the sustained elevated inflation (which could be exacerbated by subsidy rationalisation) that eats into consumers’ spending power. Meanwhile, the return of tourists and additional contribution from Pavilion Bukit Jalil could support rentals and tenancy for the group. Notably, a targeted occupancy rate of 92% by end-FY24 for Pavilion Bukit Jalil could bring the mall closer to its targeted annualised NPI of RM146m (1HFY24 at RM52.4m).

Forecasts. Maintained.

Valuations. We also keep our TP of RM1.59 and FY25F NDPU of 9.5 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 Elite Paviliion Mall. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

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. They will also benefit from the return of international tourists and higher tourist spending spurred by the weak MYR. Maintain OUTPERFORM. PAVREIT is one of our Top Picks within the REIT sector.

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 - 18 Jul 2024