Investment Highlights

• We initiate coverage on Hektar Real Estate Investment Trust (Hektar REIT) with a HOLD recommendation and a DDM-based fair value (FV) of RM0.60/unit. Our FV reflects a 3% premium for a 4-star ESG rating.

• The group is expected to record a net income of RM18.6mil in FY2F, RM19.1mil in FY23F and RM19.4mil in FY24F. This is after accounting for: (i) negative rental reversion rate in FY22F (ii) a 2%-4% increment in rental rate from FY23F onwards; (iii) 1% yearly rise in occupancy rates for retail properties held by the group; and (iv) higher borrowing cost.

• Frasers Centrepoint Trust (FCT) is a substantial unitholder and strategic partner with a 31% equity stake in Hektar REIT. It is also one of the largest owners of suburban retail centres in Singapore. The strategic partnership with FCT is envisaged to assist Hektar REIT in expediting its acquisition plans, via pursuing joint venture opportunities, securing funding and leverage synergies on expertise and retail connections.

• As of 31 December 2021, regional malls with a total net lettable area (NLA) of more than 500,000 square feet have contributed 61% of the group’s total gross revenue. The key retail malls owned by the REIT are Subang and Mahkota Parade.

• The narrowing yield spread between Hektar REIT and 10-year MGS is mainly attributed to the increase in 10- year MGS yield. This follows the upward trend in the yield on the US 10-year Treasury (+152 bps). We forecast a distribution yield of 7.2% for FY22F, which is slightly above peers’ average distribution yield of 5%, and its historical 5-year average distribution yield of 6%. In view of the rising interest rate environment, market sentiment on REITs is anticipated to remain subdued in the near term.

• We are cautious about Hektar REIT due to: (i) expectation of negative rental reversion in FY22F to boost occupancy rates amid the existing oversupply of retail spaces in Malaysia; (ii) bumpy outlook for retail sales amid inflationary pressures which is expected to dampen consumer spending on discretionary goods; (iii) declining occupancy rate for Subang Parade and Mahkota Parade; (iv) its concentrated tenant mix, with the tenants from departmental stores occupying a substantial 40% of total available NLA of the REIT’s assets.

Source: AmInvest Research - 24 Jun 2022