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.

• We made no changes to our earnings forecasts as  Hektar’s 1QFY23 distributable income of RM9mil came in  within our expectation. It accounted for 26% of our FY23F  earnings.

• In 1QFY23, Hektar’s gross revenue slid 1% YoY while net  property income (NPI) fell 9% YoY, exacerbated by higher  operating expenses driven by higher utilities cost as a  result of a recent electricity tariff hike.

• QoQ, Hektar’s 1QFY23 revenue rose 10% while NPI surged  52%. The stronger NPI was mainly attributed to the lower  mall upkeep as well as repair and maintenance expenses incurred in 1QFY23. 

• There was no income distribution declared in 1QFY23 due  to its semi-annual distribution policy.

• QoQ, average occupancy rate inched up 1%-point to 84%  (Exhibit 2), mainly contributed by higher occupancy rates  in Subang Parade, Mahkota Parade, Wetex Parade and  Central Square. As at 31 March 2023, the committed  occupancy rate of Hektar stood at 85%. 

• Hektar has registered a positive reversion of 0.2% in  1QFY23, mainly due to positive reversions at Mahkota  Parade and Kulim Central (Exhibit 4). Nevertheless, we still  expect a slight negative rental reversion of <-5% in FY23F  as we believe Hektar needs to offer more competitive  rental rates in its underperforming malls, particularly  Subang Parade, to retain existing tenants and attract new clients.

• Given weaker economic data and softening inflation in  United States (US), we anticipate the US Fed Funds rate to  peak at current level of 5%-5.25% after the recent 0.25%  hike in May 2023. If the US inflation rate continues to  decline over the subsequent months, we may see a pause  in the US monetary tightening cycle. 

• As such, we do not rule out the possibility that the 10-year MGS yield could ease further from our 2023F yield of  3.8%-4% if there are signals affirming a less hawkish tone by the US Federal Reserve, resulting in a pause in Fed  Funds rate hikes, as well as the tapering of inflation rates globally which will reduce pressures on central banks,  including BNM, to continue raising interest rates.

• From FY23F onwards, we anticipate Hektar’s distribution yield spread against 10-year MGS to widen to 5% vs. 5- year median of 4%. Hence, we expect Hektar to appeal to yield-seeking investors with its higher dividend spread against 10-year MGS (Exhibit 5).

• Hektar’s 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  as 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 - 26 May 2023