Investment Highlights

• We maintain BUY on Hektar with a higher fair value (FV) of RM0.81/unit (from RM0.73/unit) based on the dividend discount model (DDM).

• The increase in our FV is mainly attributed to stronger-thanexpected rental and other income in FY22F, partially offset by higher risk-free rate due to the surge in 10-year Malaysian Government Securities (MGS) to 4.3% from 3.9%. No changes to our 4-star ESG rating (Exhibits 6, 7).

• Hektar reported a 9MFY22 distributable income of RM34mil. Excluding a one-off other income of RM2mil, its adjusted distributable income (ADI) of RM31mil (x3.3 YoY) came in way above our FY22F distributable income. It accounted for 116% of our earlier full-year estimates.

• The variance was mainly due to reversal of impairment losses of trade receivable totaling RM4mil in 9MFY22. Nevertheless, we do not foresee a material reversal of impairment in the upcoming quarters based on our recent checks with management.

• Additionally, higher tenant sales have increased the variable portion of rents tied to the level of retail stores’ business transactions. In 9MFY22, Hektar’s tenant sales had recovered to 89% of the pre-pandemic level.

• We raise our FY22F/FY23F/FY24F ADI forecast by 47%/26%/27%. This is to factor in the higher reversal of impairment losses of trade receivables in FY22F, and raise our assumption on higher turnover rent due to improving footfall expectations in FY23F/FY24F.

• In 3QFY22, Hektar’s gross revenue rose 62% YoY while net property income (NPI) climbed 77% YoY. The improvement was driven by higher turnover rent and lower rental rebates offered to tenants.

• QOQ, Hektar’s revenue expanded 6% to while NPI improved 34%. The higher NPI was mainly attributed to lower property maintenance cost in 3QFY22.

• No distribution was proposed for 3QFY22 as Hektar intends to make distributions on a semi-annual basis. We anticipate a higher reported distribution per unit (DPU) of 7.6 sen in FY22F vs. 6.2 sen in FY23F/FY24F due to recognition of one-off other income and reversals on impairment of trade receivables, which will be distributable to unit holders.

• Hektar’s debt-to-asset ratio fell slightly to 46.4%, below the REITs’ statutory limit of 50% (statutory limit after 31 December 2022).

• QoQ, average occupancy rate declined to 83% from 85%, mainly attributed to the lower occupancy rates in Subang Parade and Central Square. The occupancy rate in Subang Parade fell to 74% from 81% due to the exit of 2 major tenants in 3QFY22. We understand from management that Hektar is in the midst of discussion with several parties to occupy the space, which is expected to be filled up after the Chinese New Year in 2023 (Exhibit 2).

• On a positive note, the occupancy rate for Mahkota Parade, Wetex Trade, Kulim Central and Segamat Central remained stable in 3QFY22 (Exhibit 2).

• 22% of its tenancies (based on net lettable area) are set to expire in FY22F. As at 30 September 2022, 14% of the tenancies have been renewed while the remaining 8% will be renewed in 4QFY22 (Exhibit 3).

• We are concerned on Hektar’s rental reversion as it has registered negative reversion since the beginning of the Covid-19 pandemic outbreak. However, we saw that the negative rental reversion has narrowed to 6.2% in 3QFY22 from 12%-17% in 3QFY21 to 2QFY22, in tandem with improving footfalls (Exhibit 4). Nevertheless, we foresee a narrower negative rental reversion (<-5%) in FY23F with the expectation of gradual improvement in tenants’ sales as compared to FY22F.

• The recent aggressive policy rate hikes in the United States (US) has caused the US treasury yield to rise and this in turn has spilled over and resulted in an increase in 10-year MGS yield. However, we anticipate that the uptrend in 10- year UST yield to be tapering off with the expectation that the Federal Reserve may ease off aggressive rate hikes after the end of 2022 as a result of weaker economic data.

• Meanwhile, we anticipate the yield spread to be widening from FY22F onwards with the gradual recovery of retail footfalls and tenant sales, which will translate into higher distribution yields of 10%-13% on a reported basis in FY22F- 24F vs. 5% in FY21. We expect Hektar to be appealing to yield-seeking investors with its higher yield spread against 10-year MGS (Exhibit 5)

• Hektar currently trades at a compelling FY23F PE of 8x vs. its 2-year average (pre-pandemic, FY18-19) of 15x. Meanwhile, distribution yield for FY23F of 11% is attractive vs. 10-year MGS yield of 4%.

• We like Hektar due to:
  (i) its diverse portfolio of neighbourhood shopping centres located strategically over 4 states (Selangor, Melaka, Johor and Kedah) in Peninsular Malaysia;
  (ii) most of its retail malls (Kulim Central, Central Square and Wetex Parade) have a more consistent customer base since they are either the only mall in that particular town or the dominant shopping centre; and
  (iii) its strategic collaboration with Frasers Centrepoint Trust will help Hektar expedite acquisition plans, working on joint venture prospects, obtaining financial assistance and leverage synergies on skills, experiences and retail connections.

Source: AmInvest Research - 16 Nov 2022