Investment Highlights

• We maintain BUY on Hektar with a lower fair value (FV) of RM0.71/unit (from RM0.75/unit previously) 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 7%, 0.4 standard deviation below its 5-year median.

• The lower FV stems from the lowering of FY23F/FY24F/FY25F distributable income by 12%/9%/9% to account for slower-thanexpected recovery of rental reversion and occupancy rates in Subang Parade.

• Hektar’s 9MFY23 distributable income of RM23mil came in below our expectation, making up only 66% of our earlier FY23F earnings. As a comparison, 9M accounted for 60%-92% of FY20- FY22 distributable income.

• The variance to our forecast was mainly due to lower-thanexpected revenue as a result of negative rental reversion for most of its malls in FY22.

• In 9MFY23, Hektar’s gross revenue fell 6% YoY while net property income (NPI) slid 5% YoY. This was primarily attributed to negative FY22 rental reversion. However, its adjusted distributable income reduced 32% YoY, exacerbated by increased finance cost.

• QoQ, Hektar’s 3QFY23 revenue improved 2% while NPI slid 1%, mainly attributable to higher utilities expenses. Coupled with increased finance cost, 3QFY23 distributable income was 2% lower QoQ.

• No income distribution has been declared in 3QFY23 due to its semi-annual distribution policy.

• QoQ, average occupancy rate increased 2%-point to 88% (Exhibit 2), with an improvement in all its retail malls except Segamat Central.

• Hektar has registered a positive reversion of 1.8% in 3QFY23, mainly due to positive reversion at Kulim Central and Wetex Parade (Exhibit 4). For FY23F, we expect a flattish or slightly negative rental reversion as we believe Hektar need to offer more competitive rental rates in its underperforming malls, particularly Subang Parade, to retain existing and attract new tenants.

• As at 30 September 2023, 24% out of the 29% floor space or net lettable area (NLA) occupied by tenancies which will be expiring in FY23F were renewed (Exhibit 3).

• Our in-house economist anticipates the Fed fund rate to peak between 5.5%-5.75% by 4QCY23 from current levels of 5.25%-5.5%. We expect the uptrend in 10-year US Treasury yield to taper off after a pause in the Federal Reserve’s rate hikes in 4QCY23. Our in-house economist also expects the Federal Reserve to start cutting interest rate in mid- 2024 by 75-100bp. This would eventually bring the Fed fund rate to 4.5%-4.75% by the end of 2024.

• 10-year MGS yield is projected by our economics team at 3.95% in 4QCY23 with a gradual decline to 3.8% by 4Q2024. However, we do not rule out the possibility that 10-year MGS yield could be lower than our projection of 3.8% in 2024 should there be an earlier-than-expected Fed pivot on US interest rates.

• From FY24F onwards, we anticipate Hektar’s distribution yield spread against 10-year MGS to widen to 4%-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’s FY24F distribution yield of 7.6% is attractive vs. 10-year MGS yield of 3.85%. 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 could 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 - 23 Nov 2023