Hektar’s 1Q15 core profit came in line with our and street estimates. Maintain NEUTRAL and DDM-derived TP of MYR1.51 (1% downside). Although we are wary of the impact of the recent implementation of the GST on retail-focused REITS, we believe Hektar’s focus on household shoppers could help cushion the impact. Dividend yield remains attractive at 7% for FY16F.

No surprises. Hektar REIT’s (Hektar) 1Q15 core net profit of MYR11.1m (+6.1% YoY, -3.1% QoQ) was in line, at 24.5% of our/consensus full-year estimates. Revenue increased 3.4% YoY due to improved revenue from Central Square Mall (CSM) post its asset enhancement initiatives (AEIs). 1Q15 saw portfolio occupancy improving to ~95.1% (4Q14: 94.3%) along with positive rental reversions of 6%. A 2.6-sen dividend per unit was declared for the quarter, at 24.7% of our full-year DPS forecast of 10.5 sen. On an annualised basis, this works out to be a dividend yield of 6.9%.

Latest updates. Management recently announced that it will be focusing on organic growth for FY15. It is upbeat on achieving higher rental reversions from CSM post-AEI, which has been fully completed recently. However, the mall is still awaiting the opening of its cinema in 3Q15. We are upbeat on CSM’s future prospects, given Hektar’s past track record with Wetex Parade, which saw a double-digit rental growth post-AEI in 2010. Additionally, management reiterated that the REIT is committed to paying out at least 90% of its earnings as dividends to its unit holders.

Forecasts. Unchanged at this juncture.

Still NEUTRAL. We maintain our NEUTRAL call and DDM-derived MYR1.51 TP. We believe the impact of the goods and services tax (GST) on the REIT could be cushioned by Hektar’s focus on household shoppers. Additionally, we view its FY16F dividend yield of 7% as attractive relative to its peers, which are larger in size. We believe the acquisition of new and accretive assets ought to be a re-rating catalyst for the REIT.

Financial Exhibits

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.

Recommendation Chart

Source: RHB Research - 18 May 2015