PAVREIT's 9MFY24 results disappointed. Revenue and net profit surged by 22% and 13% respectively, driven largely by contribution from new asset Pavilion Bukit Jalil and positive rental reversions. However, occupancy growth in Pavilion Bukit Jalil fell below market expectations. We trim our FY24F forecasts by 3%, but maintain TP of RM1.66 and OUTPERFORM call.

PAVREIT's 9MFY24 net profit of RM229.2m was below market expectations, making up 65% and 69% of our full-year forecasts and consensus estimates respectively. The negative deviation was due to slower progress seen in Pavilion Bukit Jalil. No distributions were announced as the group usually declares biannually.

YoY, its 9MFY24 revenue increased by 22% mainly driven by the contribution from its new asset Pavilion Bukit Jalil of which acquisition was completed in June 2023, together with positive rental reversions.

Core net profit rose by a smaller 13% given higher financing costs and operating expenses.

QoQ, revenue grew by 3% while net profit surged 18% as operating expenses eased mainly due to reversal of doubtful debts.

Outlook. PAVREIT's assets in the KL city centre, i.e. Pavilion KL and Elite Pavilion Mall, have been able to see sustained footfall despite the entry of TRX mall. The absence of luxury tax in Budget 2025 could also provide relief to the luxury market at least in the near term.

We have expected more rental income contribution from Pavilion Bukit Jalil as per management's target of 92% tenant occupancy by end- FY24. However, according to latest updates, the mall appeared to be facing difficulties achieving the target with occupancy seemingly stagnant from its last reported 88% in 2QFY24. Still, we maintain a positive view on the long-term prospects of Pavilion Bukit Jalil as we believe the strong footfalls at the mall will gradually drive up the sales of its tenants.

Forecasts. We trim our FY24F earnings by 3% on lowered expectations for Pavilion Bukit Jalil's near-term rentals growth, as we believe the growth in occupancy rates may come at a slower pace.

Valuations. We keep our TP at RM1.66 based on FY25F NDPU of 9.5 sen. This is against an unchanged target yield of 5.75% (derived from a 2.0% yield spread above our 10-year MGS assumption of 3.75%). 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 still resilient and will only see marginal impact from the entry of TRX, which we believe have been largely priced into the market. PAVREIT will also benefit from the return of international tourists and higher tourist spending spurred by government's higher budget allocation on tourism.

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 - 25 Oct 2024