• Established in 2006, Hektar has now expanded its property portfolio to 6 shopping centres spanned across Subang Jaya, Melaka, Muar, Sungai Petani, Kulim, and Segamat worth a total of RM1.20 bn.

• We project core earnings to be driven by improving occupancy rate amid economic recovery in FY24f, as well as the REIT’s initiatives to improve energy efficiency.

• Hektar is valued by pegging its FY23f core EPS of 7.7 sen to P/E of 11.0x, leading to a FV of RM0.84. Projected dividend yield is attractive at 9.9% for FY23f based on current share price.

Company Background

• Hektar was established on 5th October 2006 and listed on the Main Board of Bursa Malaysia on 4th December 2006. The REIT is managed by Hektar Asset Management while the shopping centres owned by the REIT is managed by Hektar Property Services. MTrustee is the legal custodian of the REIT. The REIT’s cornerstone investor is Frasers Centrepoint Trust, part of Frasers Property Group, headquartered in Singapore.

• Hektar’s strategy is to create lifestyle destinations where people love to shop, dine, and play, focusing on retail assets in underserved markets across Malaysia. Meanwhile, the REIT seeks yield-accretive acquisition of stabilised properties (assets with sustainable cash flow requiring selective optimisation initiatives) or turnaround properties (assets with solid fundamentals which are underserving their market, requiring intensive value creation initiative to turnaround the property and increase its yields in medium to long term).

• To date, Hektar owns 6 neighbourhood shopping centres throughout Peninsular Malaysia. Its portfolio includes high-quality properties situated in Subang Jaya, Melaka, Muar, Sungai Petani, Kulim, and Segamat worth a total of RM1.20 bn.
• Subang Parade’s positioning strategy is currently neighbourhood-focused. The appeal of the mall lies in its ability to provide value and convenience to its shoppers. In line with the REIT’s tenancy rejuvenation plans, Subang Parade saw entry of new retailers such as Eco Shop, Marina Nail Spa, and Original Classic in 2021, as well as the opening of Golden Screen Cinemas (GSC) in January 2022 following GSC’s successful acquisition of MBO outlet in Subang Parade.
• Mahkota Parade was located in the heart of historic Melaka. It is positioned as the premier shopping centre in Melaka with Parkson Department as its anchor. The centre also acts as focal point for major community events, tourist events, and exhibitions. New tenants in 2021 include Skechers, Llao Llao, and Gatti Sports.
• Wetex Parade and Classic Hotel in an integrated retail and hotel development located within the commercial heart of Muar, Johor. Opened in 1996, Wetex Parade continues to be the sole department store anchored shopping centre in town and is the premier retail destination for the royal town. The mall welcomed EEK Mart, Carlo Rino, Original Classic and Boost Juice in 2021.

• Central Square was completed in 1997 and acquired by Hektar in 2012. The mall is the most established retail centre in Sungai Petani and is regarded as one of the city’s most recognisable landmarks. Hektar remains committed to improve Central Square’s tenant mix and positioning. Original Classic, 7-Eleven, and GSC are recent additions.

• Acquired by Hektar in 2012, Kulim Central is the only shopping centre in Kulim, Kedah. The mall, formally known as Landmark Central, was refurbished and rebranded in 2017. The asset enhancement initiatives (AEI) have continued to yield favourable results as new tenants such as Original Classic, The Coffee Bean & Tea Leaf and Mi Store made their entries into Kulim Central in 2021.

• Segamat Central is the only purpose-built shopping centre in Segamat. The mall is directly linked to Segamat’s main bus terminal and is within walking distance of the KTM railway station. In Segamat, it also has the largest cinema. Management concentrated on a “occupancy first” strategy by executing rental revision approach to retain existing tenants as well as attract specialty anchors and more F&B retailers. The mall saw the opening of Original Classic and Switch in 2021, as well as KS Mart Signature and Siam Restaurant in 2022.

• Hektar optimises its portfolio by aligning the tenancy mix to the needs of target shoppers to provide a sustainable return. Department stores and supermarkets continue to dominate the portfolio in terms of Net lettable area (NLA) occupancy, occupying 40.0% of all available NLA in FY21, followed by food & beverage (12.0%), and fashion & footwear (11.0%). The REIT continues to implement strategic marketing initiatives as well as asset enhancements to drive traffic and improve tenants sales, thereby improve long-term yields.

• In FY07-FY19, Hektar’s portfolio had an overall occupancy rate of over 90.0%. The occupancy rate declined to 88.4% and 84.9% in FY20 and FY21 respectively, as the Covid-19 pandemic’s impact on the retail industry persisted. In FY21, Kulim Central, the sole shopping centre in Kulim, Kedah, had the highest occupancy rate among Hektar’s properties. On the other hand, Segamat Central had the lowest occupancy in FY21 at 67.3%.

Ongoing energy efficiency initiative

• Hektar strives to use energy in the most efficient and cost-effective manner. One of the initiatives undertaken by Hektar was a major air-conditioning and mechanical ventilation (ACMV) retrofit and automated Building Management System installation at Subang Parade in 2018, which resulted in 34.0% average reduction in electricity consumption. A similar retrofit exercise was conducted at Central Square which resulted in an estimated 23.1% of energy savings. The REIT is examining the feasibility of installing solar panels on the rooftops of all its malls, which can help further reducing its energy consumption.

Financials

• Hektar’s core net profit decreased by 60.4% and 10.6% YoY to RM14.2m and RM12.7m in FY20 and FY21, respectively. The decline was largely due to a drop in occupancy rate due to the imposition of the Movement Control Order (MCO) in Malaysia which caused business closures nationwide and a standstill in retail activity for most of the quarter. Besides, the lower core net profit was also ascribed to a negative rental reversion rate as a result of the REIT’s rebate offers for eligible tenants. Meanwhile, Hektar continued to optimise its capital structure to fund acquisitions and asset enhancements. Gearing ratio as at 3QFY22 stood as 46.4%, well below the 60.0% gearing limit announced by the Securities Commission.

• Moving forward, we are projecting the core net profit to improve 211.0% YoY to RM39.5m in FY22f, taking into account the normalising occupancy rate and rental reversion rate, as well as the reversal of impairment losses of trade receivables as the retail sector continue to recover amid resumptions of economic activities. Meanwhile, a margin growth is projected for FY22f.

• For FY23f, we anticipate Hektar’s top line to register growth at RM122.2m (+2.0%), supported by further improvement in the portfolio occupancy rate amid economic growth. Bottom line, however, is projected to be lower at RM36.1m (-8.6%), due to lower margin brought on by the absence of reversal of impairment losses of trade receivables as well as higher borrowing costs in the interest rate upcycle environment

Valuation

• At RM0.70, Hektar’s forward PE valuation for FY22f and FY23f stands at 8.3x and 9.1x, based on our estimated FY22f and FY23f EPS of 8.4 sen and 7.7 sen respectively. We arrived our fair value of RM0.84 (20.0% potential upside from its current price) by ascribing a target PE of 11.0x to its FY23f EPS.

• The assigned target P/E represents approximately 30.0% discount to the average P/E of related companies listed on Bursa Malaysia for FY22/23f at 15.6x. The discount is premised to Hektar’s smaller market capitalisation.

• We like Hektar’s malls of being either dominant mall or the only mall in a particular town that can capture the improving traffic amid economic recovery. We also favour the REIT’s ongoing energy efficiency initiatives which may result in lower energy consumed and higher profitability.

• Meanwhile, Hektar remained committed to maintain a distribution policy of at least 90.0% of its distributable income. The distribution per share is projected at 7.5 sen and 6.9 sen for FY22f and FY23f respectively.

Source: Mplus Research - 3 Jan 2023