· Focusing on organic growth in FY15. HEKTAR refurbished Central Square and Mahkota Parade in FY14, which affected FY14 earnings (- 4.1%) due to loss of rental income from both malls. Post completion of Central Square refurbishment recently, management will be focusing on improving rental reversions while refurbishment for Mahkota Parade is set for completion by 3Q15. As such, we expect organic growth to drive rental income in FY15 as both these malls would be tenanted with better rental rates.

· FY15 a major rental reversion year. FY15 is a major rental reversion year with 52% of portfolio NLA up for renewal. We believe this may be a swing factor for HEKTAR and a testament to management’s capability in pushing for strong rental reversions. Should the impact of GST (April 2015) be worse than expected, commanding strong rental reversions may be tough this year, limiting the REIT from charging tenants high rental reversions in order to maintain tenant occupancy. We are of the view that even if management maintains flattish rental reversions, we can still expect topline growth from additional income from the refurbished Central Square and Mahkota Parade. HEKTAR’s next major rental reversion year will likely be in 2018. We are projecting FY15-16E RNIs of RM468.5-RM485.0m to reflect the above.

· Asset acquisition of up to RM169.2m possible at current level. Our channel checks reveal that asset valuations are stabilizing, which increase the odds of acquisitions going forward. HEKTAR’s gearing is high at 0.42x currently, implying they can borrow another RM190.0m before hitting SC’s prescribed gearing limit of 0.50x. Alternatively, HEKTAR can also raise funds of RM114.2m via a cash call (20% placement based on a 5% discount to the 5-day VWAMP of RM1.50) and gearing up again to 0.40x, which will imply total funds of RM169.2m. This is a sufficient funding amount for HEKTAR as its previous acquisitions outside the Klang Valley ranged between RM83.0m – RM117.5m. HEKTAR is keen on acquiring suburban malls in non-Klang Valley states given the low base effect from these malls and the absolute acquisition values that are within their funding range.

· HEKTAR has been consistent in providing stable dividend payouts of 90% - 95% of distributable income. Based on 92% payout, we expect FY15-16E GDPS of 11.0 sen each (7.3% yield). This is attractive when compared to other retail MREITs under our coverage of 5.2%-6.4% gross yields. However, we do qualify that HEKTAR’s market capitalisation of RM597m is much smaller than other retail MREITs (RM2.5b-RM4.5b size) which may warrant the higher yield spread to other retail MREITs. On the flip side, other retail MREITs also has relatively higher foreign shareholding vs. HEKTAR. · Over the last few weeks, MREITs have seen higher volatility due to the volatile bond market, economic uncertainties and US interest rate directions. We reckon that MREITs with higher yields with minimal foreign shareholding exposure have less downside risks to share prices over the next few months.

· TRADING BUY with a Fair Value of RM1.57 based on a target yield of 7.0%. Our target yield is based on a +3.10 ppt spread (1-year average) to our 10-year MGS target of 3.90%. At current levels, HEKTAR is commanding total returns of 11.4%, with a gross dividend yield of 7.3%, which is better than large cap (>RM1.0b) retail MREITs’ average of 5.7%.

Source: Kenanga Research - 25 Jun 2015