S & P Results Review & Earnings Outlook

? Hektar REIT?s 1Q10 results were within our expectations. Hektar REIT posted a 10% YoY increase in net profit to MYR10.0 mln on the back of a 5.7% YoY rise in turnover to MYR23.0 mln. The rise in revenue was due mainly to higher occupancy of 97.3% in 1Q10 vs. 95.9% in 1Q09.

? Overall, on a quarterly basis, portfolio average occupancy rate has improved to 97.3% in 1Q10 from 95.8% in 4Q09. Wetex Parade in Muar, Johor posted a higher occupancy rate of 91.2% vs. 90.1% in 4Q09 while Subang Parade?s occupancy rate was unchanged at 100%. Mahkota Parade in Melaka also saw a rise in occupancy rate to
96.8% from 93.6% in 4Q09.

? However, Hektar REIT posted an average 7% decline in rental reversions, due mainly to a 16% negative rental reversion in Mahkota Parade, which was undergoing a refurbishment exercise that has just been completed in April 2010. Wetex Parade posted a positive rental reversion of 6% while Subang Parade has flat rental reversion.

? Hektar REIT declared a first interim 1Q10 dividend of 2.5 sen vs 2.4sen in 1Q09.

Recommendation & Investment Risks

? We maintain both our Buy recommendation and 12-month target price of MYR1.40. Hektar REIT?s unit price is well supported by its high dividend yield.

? Our 12-month target price of MYR1.40 was derived by applying a 9% (unchanged) discount to our DDM valuation. The primary assumptions behind our DDM valuation are a cost of equity of 8.30% - 9.50% and DPU growth of 0%-3%.

? At the current level, Hektar REIT offers an attractive dividend yield of 8.3%. Moreover, suburban neighborhood retail properties normally enjoy more stable occupancy and rental income than other types of commercial properties such as offices and urban retail properties.

? Risks to our recommendation and target price are: (i) a sharp and prolonged economic slowdown in Malaysia; and (ii) an unexpected rise in interest rates, which will have a negative impact on the occupancy, rental income and market value of retail properties.