Investment Highlights

• We maintain BUY on Hektar with an unchanged fair value (FV) of RM0.81/unit based on our dividend discount model (DDM), which incorporates a 4-star ESG rating (Exhibits 6, 7).

• The FV implies a FY24F distribution yield of 8%, at parity to its 5-year median.

• Hektar reported a FY22 distributable income of RM36mil. Excluding a one-off other income of RM2mil, its adjusted distributable income (ADI) of RM34mil (x2.7 YoY) was 17% below our forecast.

• The variance was mainly due to the lack of reversal of impairment losses in trade receivable in 4QFY22. Nevertheless, our FY23F/FY24F earnings are maintained as we have not factored in any writeback of impairment losses for the coming years.

• In FY22, Hektar’s tenant sales recovered to 97% of the prepandemic level.

• We also take the opportunity to introduce our FY25F earnings with a growth of 4% on expectation of improving tenant sales, which increases the variable portion of rents tied to the level of retail stores’ business transactions.

• In FY22, Hektar’s gross revenue rose 22% YoY while net property income (NPI) expanded 25% YoY. The improvement was driven by higher rent tied to sales turnover and lower rental rebates offered to tenants.

• QoQ, Hektar’s 4QFY22 revenue declined 10% while NPI dropped 45%. The weaker NPI was mainly attributed to higher mall upkeep as well as repair and maintenance expense incurred in 4QFY22 to cater for improving domestic demand as economic activities normalised.

• Hektar declared its gross distribution per unit (DPU) of 5.3 sen in 4QFY22. The FY22 DPU of 8 sen represents an impressive distribution yield of 12%. However, we anticipate a lower FY23F/FY24F DPU of 6.2 sen as our forecasts have not factored in any reversals on impairment of trade receivables, which will be distributable to unit holders.

• QoQ, average occupancy rate remained stable at 83% (Exhibit 2). The increase in the occupancy rates of Kulim Central, Mahkota Parade and Segamat Central were offset by a lower occupancy rate in Subang Parade. As at 15 February 2023, the committed occupancy rate of Hektar stood at 84%.

• We are concerned on Hektar’s rental reversion as the REIT has registered negative reversion since the beginning of the Covid-19 pandemic outbreak. However, we saw that the negative rental reversion has narrowed to 7% in 4QFY22 from 12%-17% in 3QFY21 to 2QFY22, in tandem with improving footfalls (Exhibit 4). We expect a further improvement in rental reversion (<-5%) in FY23F with the expectation of gradual improvement in tenant sales as compared to FY22.

• In light of the stronger-than-expected economic data as well as stickier inflation readings in January 2023, our inhouse economist projects a more aggressive 0.75% hike (from 0.5%) in the Fed rate in 1HCY23 from the current level of 4.5%-4.75% to tackle inflationary pressures. Meanwhile, the likelihood of a rate cut in this year is dwindling. This means that we may see the Fed Funds Rate staying at 5.25%-5.5% towards the end of this year. Pending more clarity from the upcoming Federal Open Market Committee and Bank Negara Malaysia Monetary Policy Committee meetings, we anticipate that the 10-year MGS yield could remain fluid in the near future.

• Nevertheless, we expect to see the impact from the rate hike to be manifested in 2HFY22 with more signs of tapering inflation as well as slower wage growth. This could result in the stabilisation of Fed rate as well as 10-year MGS in 2HFY22. Hence, our in-house forecast on 10-year MGS yield is maintained at 3.8%-4% by the end of 2023.

• We also foresee the yield spread from FY23F onwards to widen to 5% vs. 5-year median of 4%. Hence, we expect Hektar to be appealing to yield-seeking investors with its higher dividend spread against 10-year MGS (Exhibit 5).

• Hektar currently trades at a compelling FY24F PE of 10x vs. its 2-year average (pre-pandemic, FY18-19) of 15x. Meanwhile, FY24F distribution yield of 9% 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, work on joint venture prospects, obtain financial assistance and leverage on synergies in skills, experience and retail connections.

Source: AmInvest Research - 24 Feb 2023