Hektar REIT’s FY14  net  profit  came  in line  with  expectations. Maintain NEUTRAL  with  a  revised  DDM-based  TP  of MYR1.51 (0%  upside).  YoY earnings growth saw a contraction due to the disruptions from ongoing refurbishments. We believe that FY15 earnings should come in stronger once  the  ongoing  refurbishments  are  completed.  Management continues to reiterate its policy to maintain its DPU of at least 10.5 sen.  
 
Results  in  line.  Hektar REIT’s 4Q14  core  net  profit  of  MYR11.4m  (-12.9%  YoY,  5.3%  QoQ)  brought  FY14  net  profit  to  MYR44.3m  (-4.1% YoY), in line with our/consensus estimates. Net profit contracted YoY as it continued to be affected by disruptions from Central Square’s (CS) ongoing asset enhancement initiatives (AEI) and the electricity tariff hike during  the  year.  That  said,  full-year  net  property  income  (NPI)  margin was still stable at 60.1% (FY13: 61.6%). As expected, it has announced a DPU of 2.70 sen for 4Q14, bringing total FY14’s total DPU to 10.5 sen, in  line  with  guidance.  Its  overall  portfolio  occupancy  is  still  stable  at 94.3%, and the average rental reversion is about 6% for FY14.  

2015 outlook. We expect FY15 earnings to bounce back and be further enhanced by the completion of the refurbishments in Central Square and Mahkota Parade, both of which are expected to be completed by 2Q15. Although  management is  wary  of the  impact  of  goods  and services  tax (GST)  on  sales  and  shopper  traffic,  we  believe  that  earnings  should remain  resilient,  given  that  its  malls  are  targeted  towards  the  mass market.  Based  on  our  recent  checks  with  the  REIT,  the  impact  of  the electricity tariff reduction from March onwards is negligible, as the REIT’s bottomline  will  only  be  boosted  by  about  1  to  2%.  Management maintains its dividend policy of at least 10.5 sen going into 2015.

Earnings forecasts. Our FY15/16 earnings forecasts are trimmed by 5-6%  after  updating  our  FY14  numbers  and  to  be  more  in  line  with management’s guidance. We have also introduced our FY17 numbers.

Maintain NEUTRAL. Our DDM-based TP  has been raised to MYR1.51 (from  MYR1.43)  after  rolling  over  our  valuation  period  and  fine-tuning some valuation assumptions. Given Hektar REIT’s past track record, we remain  confident  of  its  future  DPU  delivery.  Hektar  also  continues  to provide a decent gross dividend yield of 7%.

Financial Exhibits

SWOT Analysis

Company Profile

Hektar REIT is a mid-cap retail REIT specialising in suburban malls. Its major assets include Subang Parade and Mahkota Parade.

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Source: RHB