Investment Highlights

• We maintain BUY on Hektar with a lower fair value (FV) of RM0.75/unit (from RM0.81/unit previously) after accounting for the dilutive issuance of placement units to finance the acquisition of Kolej Yayasan Saad (KYS) on our dividend discount model (DDM). No change to our 4-star ESG rating (Exhibits 6 & 7).

• The FV implies a FY24F distribution yield of 6.5%, 0.5x standard deviation below its 5-year median.

• Mtrustee, as the trustee for Hektar entered into a conditional sale and purchase agreement (SPA) with KYS College to acquire a private school known as KYS in Ayer Keroh, Melaka for RM150mil cash.

• Established in 1995, KYS is a fully residential and coeducational private school which offers secondary school education under Malaysia's New National School Curriculum (KBSM) for students from Form 1 to Form 5.

• KYS comprises a single, 1 ½, 2 and 3-storey buildings which are categorised into administration, academic, residential and student facilities (Exhibit 2).

• The vendor, KYS College had on 22 June 2023 leased KYS to KYSA Education (the existing operator of KYS) for a period of 30 years.

• Upon the completion of acquisition in 2QFY24, the lease will be novated to Mtrustee by way of a deed of novation to be entered between KYS College (Vendor), Mtrustee (Trustee) and KYSA Education (Lessee).

• KYS will be leased to the lessee under a quadruple-net lease arrangement, whereby the lessee shall be responsible for the operation, maintenance, replacement and repair (including structural repair) of the property at its own cost and expense.

• The annual rental payment is fixed at RM8.1mil for the first year, followed by a 2.5% yearly rental escalation.

• The acquisition price of RM150mil is equivalent to its market value, as ascribed by independent valuer, Jones Lang Wootton.

• The acquisition will be funded through a combination of borrowings, internal funds and proceeds to be raised from a proposed placement.

• The proposed placement involves the issuance of up to 99.8mil placement units, representing up to 20% of the REIT’s existing issued units. The issue price will not exceed a discount of 10% to the 5-day volume weighted average market price (VWAP) of Hektar immediately preceding the price-fixing date.

• Assuming the issue price at RM0.567, which represents a discount of 10% to the current 5-day VWAP, we project that Hektar will raise RM57mil from the placement with the remaining RM93mil from borrowings.

• Based on our assumptions, the contribution from KYS is estimated to be RM2mil to Hektar’s distributable income in FY25F-FY26F (Exhibit 1).

• Hence, we raise our FY25F distributable income by 6% after accounting for the contribution from KYS. However, we lower our FY24F distributable income by 4% as the increased revenue is unable to offset the recognition of one-off placement related expenses, which amounts to RM2mil. We also lower our FY24F/FY25F DPU by 12%/2% from the new issuance of units.

• Upon completion of acquisition, Hektar’s FY24F debt-to-asset ratio will increase to 0.48x from 0.46x.

• The acquisition of KYS will benefit Hektar in the long term, as it diversifies the overall property mix and reduces reliance on the retail sector. It is also secured by a quadruple-net lease arrangement, which provides stable recurring rental income and minimal occupancy risk to Hektar for the next 30 years.

• However, we are negative on the acquisition in the short term as the issuance of placement units will lead to a dilution of Hektar’s DPU before the earnings from KYS start contributing significantly.

• Nevertheless, Hektar’s FY24F distribution yield of 7.7% is attractive vs. 10-year MGS yield of 3.88%.

Source: AmInvest Research - 13 Sept 2023