Hektar REIT’s 2Q15 results came in line with our and consensus estimates. Maintain NEUTRAL and a MYR1.51 DDM-based TP (2.3% upside). Despite the current challenging environment, the REIT may be cushioned by stable rental reversions from Subang Parade and increased contributions from newly-refurbished Central Square Mall. We also think its dividend yield remains attractive, at 7.2% for FY16F.
In line. Hektar REIT’s 2Q15 core earnings of MYR11.9m (+3.4% YoY, 6.9% QoQ) was in line, at 50%/49% of our/consensus full-year estimates. Revenue rose 2.6% YoY due to: i) an increase in casual leasing, and ii) higher revenue contribution from Central Square Mall (CSM) post its asset enhancement initiative (AEIs). In 2Q15, portfolio occupancy rose to 96.9% (1Q15: 95.1%) along with positive rental reversion of 1.9% YTD. A 2.6-sen distribution per unit (DPU) was declared for 2Q, to be paid out 18 Sep – making up 49% of our FY15F DPS of 10.5 sen. Annualised, this works out to a dividend yield of 7%.
Briefing highlights. Management shared that the MBO cinema in CSM is now open, with four out of eight screens now available for viewing and the remaining slated for early September. This contributed to the increase in the overall 2Q15 portfolio occupancy rate, as CSM’s occupancy is now at 97.3% (1Q15: 86.3%). The REIT also indicated that there was a small change to Subang Parade’s tenant mix where three small F&B vendors are now replaced by a Watson’s Pharmacy (netlettable area (NLA): ~ 1,600 sq ft). The REIT manager also mentionedthat during the quarter. This was due to two tenants’ rental renewals, whichdragged down the overall reversion for the mall. That said, management shared that the tenants were instead charged with higher turnover rent, to be a one-off event that will not recur in the next quarter.
Still NEUTRAL. We keep our earnings forecasts, NEUTRAL call and DDM-based TP of MYR1.51 (2.3% upside, implies 12.7x FY16F P/E). Subang Parade’s stable reversions and increased contribution from the newly-refurbished CSM may continue to drive the REIT’s earnings throughout the year. Also, its FY16F 7.2% dividend yield is still attractive. New acquisitions of accretive assets would be a potential rerating catalyst for the REIT. Key risks to our forecasts: i) low occupancy rate, ii) low rental reversions and iii) increase in competition for Mahkota Parade.
Source: RHB Research - 17 Aug 2015
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