Investment Highlights

• We downgrade Hektar to HOLD from BUY with a lower fair value (FV) of RM0.67/unit (from RM0.71/unit previously) based on our revised dividend discount model (DDM), which incorporates a 3% premium from an unchanged 4-star ESG rating (Exhibits 6 & 7)

• The FV implies a FY24F distribution yield of 7%, 1 standard deviation below its 5-year median of 8%.

• The lower FV stems from the lowering of FY24F/FY25F distributable income by 2%/8% to account for slower-than- expected recovery of rental reversions and occupancy rates in Subang Parade as well as increased finance cost.

• Hektar’s FY23 distributable income of RM29mil came in below our expectation, 9% below our forecast.

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

• In FY23, Hektar’s net property income (NPI) rose 2% YoY despite a 5% YoY drop in gross revenue. The reduced revenue was mitigated by lower property operating cost as a result of the implementation of group-wide cost optimisation program. However, its adjusted distributable income decreased 21% YoY, exacerbated by increased finance cost.

• QoQ, Hektar’s 4QFY23 revenue slid 1% while NPI declined 9%, mainly attributable to higher utilities expenses.

• Hektar declared its gross distribution per unit (DPU) of 2.3 sen in 4QFY23, which represents a 12-month trailing distribution yield of 7.9%.

• YoY, FY23 average occupancy rate increased 5%-points to 87% , with an improvement in all its retail malls.

• Hektar has registered a positive reversion of 0.2% in FY23, mainly due to positive reversions at Kulim Central, Segamat Central and Mahkota Parade .

• For FY24F, we expect a flattish rental reversion as Hektar needs to offer more competitive rental rates in its underperforming malls, particularly Subang Parade, to retain existing tenants and attract new retail businesses.

• Hektar’s FY25F distribution yield stands at 7.4%, which appears unattractive when compared to its 2-year pre- pandemic (FY18-19) average of 8%. Hence, we see limited upside potential in this stock.

Source: AmInvest Research - 23 Feb 2024