1QFY20 realised net income (RNI) of RM34.6m (-23% YoY) came in slightly below our and consensus expectations at 18% and 14%, respectively, on higher-than-expected operating cost. No dividends, as expected. Lower FY20-21E CNP by 23-3% to RM152-242m post lowering margins to 29- 40% on higher operating expenses. Maintain MARKET PERFORM and TP of RM1.50 (which offers implied FY21 yield of 5.5%).

1QFY20 realised net income (RNI) of RM34.6m came in below our and consensus expectation at 18% and 14%, respectively. Top-line was within expectation at 23% of ours, but net margin was weaker than expected at 30% (vs. ours of 38%) on higher-than-expected operating cost from Covid-19 related expenses and promotional campaigns. No dividends, as expected.

Results’ highlights. YoY-Ytd, top-line was down by 23% on lower contribution from all assets due to the 14-day rent-free period for non essential tenants and lower advertising revenue. Operating cost was higher by 4% due to the Group’s contribution of providing face masks to Malaysian Government to support Malaysia’s fight against Covid-19 pandemic and higher costs incurred for Chinese New Year promotional campaigns. As a result, RNI was down by 50% to RM34.6m on the back of weaker RNI margin by 16.5ppt. QoQ, top-line was down by 20% due to similar reasons mentioned above. This cascaded straight to bottom-line which declined by 42% despite lower operating cost (-6%) and financing cost (-3%).

Outlook. FY20-21 will see 22-19% of portfolio NLA expiring, on flattish to marginally declining reversions, coupled with rental waivers for certain tenants. Occupancy appears stable for now, as mall operators would prefer to prioritise occupancy over reversion. We expect conditions at Damen mall to remain challenging in the near term given the on-going pandemic.

We lower FY20-21E by 23-3% to RM152-242m on the back of higher than-expected operating cost during this period arising from Covid-19 expenses and fixed cost. As such, our FY20-21E RNI margins are lowered to 29-41% in FY20-21 (from 38-43%). Note that we had previously lowered FY20-21E earnings by 24-6% due to potential loss of income from the Covid-19 pandemic. Our FY20-21E GDPU of 5.3- 8.3 sen (NDPU of 4.8-7.4 sen) implies gross yield of 3.2-5.0% (net yield of 2.9-4.5%).

Maintain MARKET PERFORM and TP of RM1.50. Our TP is maintained as we marginally lower FY21E GDPS/NDPS to 8.3 sen/7.4 sen by 3%, increased our spread to +2.3ppt (@ -2SD) from +2.0ppt, but on a lower 10-year MGS target of 3.30% (from 3.70%), in line with the sector. We remain cautious on pure retail MREITs as earnings continued to be hit during the Covid-19 pandemic and may prolong as the situation adjusts to the new normal in 2H 2020. We are comfortable with our call as most downsides have been priced in for now, while PAVREIT is commanding 5.0% gross yield for FY21 which is on par with its peers’ average of 5.3%.

Risks to our call include: (i) bond yield compression and expansion, vs. our target 10-year MGS yield, and (ii) strengthening or weakening rental income.

Source: Kenanga Research - 12 Jun 2020