9MFY20 realised net income (RNI) of RM76.6m (-59% YoY- Ytd) came in below our and consensus expectations at 51% and 54%, respectively, on expectations of earnings rebounding strongly in 3QFY20 post the MCO in 2QFY20. No dividends, as expected. Lower FY20-21E CNP by 35-6% to RM99-228m on potential rental waivers and single-digit negative rental reversions. Maintain MARKET PERFORM but lower TP to RM1.40 (from RM1.60).

9MFY20 realised net income (RNI) of RM76.6m came in below our and consensus expectation at 51% and 54%, respectively, as we initially expected a strong 3Q20 with malls envisaged to bounce back post the MCO which was mostly in 2QFY20. No dividends, as expected.

Results’ highlights. YoY-Ytd, top-line was down by 27% on weakness from all assets due to rental rebates to non-essential tenants during the MCO phases. This directly impacted RNI which declined by 59% despite lower financing cost (-9%) and expenditure (-15%). QoQ, top- line was up by 34% after rebounding from rental waivers in 2QFY20 with improvements from all assets. All in, RNI increased by 221% on better RNI margin of 28% (vs. 12% in 2QFY20), but still below pre- Covid-19 level of c.40%. Gearing remains stable at 0.34x.

Outlook. FY20-21 will see minimal expiries with 22-19% of portfolio NLA expiring. We expect conditions at Damen mall to remain challenging in the near term given the on-going pandemic.

Lower FY20-21E CNP by 35-6% to RM99-228.2m on potential rental waivers and single-digit negative rental reversions (from flattish to mildly negative rental reversions) for leases up for renewal as the Covid-19 situation has re-emerged in October 2020. Our FY20-21E GDPU of 3.5-7.8 sen (NDPU of 3.2-7.0 sen) implies gross yield of 2.5- 5.6% (net yield of 2.3-5.0%).

Maintain MARKET PERFORM but lower TP to RM1.40 (from RM1.60). Our TP is based on a lower FY21E GDPS/NDPS of 7.8 sen/ 7.0 sen (from to 8.3 sen/7.4 sen) and an adjusted higher spread to +2.7ppt (from +2.3ppt) at +2SD to our 10-year MGS target yield of 2.8%. Given the worsening Covid-19 situation thus far, we opt to be conservative with our earnings estimates and valuations and will continue to monitor the fluidity of the pandemic as it progresses. We remain cautious on pure retail MREITs as earnings remain particularly vulnerable to the pandemic directly affecting shopper traffic and thus tenant stability. At current levels, PAVREIT is commanding 5.6% gross yield for FY21 which is close to its peers’ average of 5.8%.

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 - 23 Oct 2020