Hektar REIT’s 9M15 results came in line with our and consensus estimates. Maintain NEUTRAL and DDM-based TP of MYR1.51 (3% downside). We believe that the REIT would continue to record low to mid single-digit rental growth over the next 12 months amidst the prolonged weak consumer sentiment. We note that Hektar REIT is currently the only retail REIT with a dividend yield of above 7%.

In line. Hektar REIT’s 9M15 net profit of MYR33.7m (+2.6% YoY) came in line at 74%/72% of our/consensus full-year numbers. 9M revenue growth of 2.7% was decent given the softer market sentiment, boosted by increased contribution from Central Square (CS) post-asset enhancement initiative (AEI). Overall occupancy was still stable at 97.5%, with YTD portfolio rental reversion at 2.5%, dragged down by negative rental reversion at Mahkota Parade as management agreed on lower rental for the new tenants that took up some long-vacated space. That said, management has charged these tenants higher turnover rental, which could help offset the lower rental base. The REIT announced a DPU of 2.60 sen, on track to meet our full-year forecast.

Soft consumer sentiment to persist over the near term. We expect consumer sentiment to only start normalising in 2H16, given higher cost of living and macroeconomic uncertainties. That said, we expect Hektar REIT’s rental growth to remain in the low to mid-single-digit level over the next 12 months, underpinned by its decent rental reversions and as most of its rental is based on fixed terms.

Key risks. Downside risks: i) prolonged weak consumer sentiment, ii) low rental reversions, and iii) increased competition at Mahkota Parade. Upside risks: i) Faster recovery in consumer sentiment and ii) less competition from surrounding malls.

Still NEUTRAL. We keep our earnings forecasts, NEUTRAL call and DDM-based TP of MYR1.51. Subang Parade’s stable reversion and increased contribution from the newly-refurbished CS may continue to drive the REIT’s earnings throughout the year. We also note that it is the only retail REIT that has a yield of above 7%. New acquisitions of accretive assets would be a potential re-rating catalyst for the REIT.

Financial Exhibits

Financial Exhibits

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 - 30 Nov 2015