Investment Highlights

• We maintain BUY on Hektar with an unchanged fair value (FV) of RM0.81/unit based on our dividend discount model (DDM), which incorporates a 4-star ESG rating (Exhibits 6 & 7).

• The FV implies a FY24F distribution yield of 8%, at parity to its 5-year median.

• We made no changes to our earnings forecasts as Hektar’s 1HFY23 distributable income of RM16mil came in within our expectation. It accounted for 46% of our FY23F earnings and 59% of street;s.

• In 1HFY23, Hektar’s gross revenue fell 4% YoY while net property income (NPI) inched up 1% YoY. The improving NPI margin were attributed to the group-wide cost optimisation programme implemented since 2HFY22. However, its adjusted distributable income reduced 21% YoY from increased finance cost.

• QoQ, Hektar’s 2QFY23 revenue declined 6% while NPI rose 2%. The stronger NPI was mainly attributed to the groupwide cost optimisation programme. However, its distributable income was 25% lower QoQ due to recognition of net provision of impairment loss in trade receivables of RM0.6mil vs. a reversal of impairment loss in trade receivables of RM2mil in previous quarter (1QFY23).

• Hektar declared its gross distribution per unit (DPU) of 2.7 sen (flattish YoY) in 2QFY23, representing a 12-month trailing distribution yield of 12%.

• QoQ, average occupancy rate increased 2% to 86% (Exhibit 2), with an improvement in all its retail malls. As at 30 June 2023, the committed occupancy rate of Hektar stood at 87%.

• Hektar has registered a slight negative reversion of 2.5% in 2QFY23, mainly due to negative reversion at Mahkota Parade and Central Square (Exhibit 4). For FY23F, we still expect a negative of rental reversion of <-5% as we believe Hektar need to offer more competitive rental rates in its underperforming malls, particularly Subang Parade, to retain existing and attract new tenants.

• Based on the information shared during the Federal Open Market Committee's post-meeting press conference, we understand that there is no certainty that another 0.25% rate hike will take place in the next meeting on 19th-20th September 2023. The decision to implement another 0.25% rate hike appears to hinge on incoming data, particularly related to labour market and inflation expectations. While awaiting economic data updates, our inhouse economists maintain their forecast, anticipating that the Fed fund rate could peak between 5.5%-5.75% by 3QCY23 from current levels of 5.25%-5.5%.

• The recent less-hawkish interest rate guidance delivered by the Federal Reserve (Fed) may suggest that we are approaching the end of global monetary policy tightening. As such, we expect the uptrend in 10-year US Treasury yield to be tapering off with the expectation that the Federal Reserve may pause rate hikes after 3QCY23. Besides, our economist forecasts 10-year MGS to be lower at 3.75% (from current level of 3.85%) in 4QCY23 with a gradual decline to 3.5% in 4Q2024. However, we do not rule out the possibility that the 10-year MGS yield could be lower than our projection of 3.75% in 2023 should there be a change in Fed’s hawkishness on rate hikes.

• From FY23F onwards, we anticipate Hektar’s distribution yield spread against 10-year MGS to widen to 6% vs. 5- year median of 4%. Hence, we expect Hektar to be appealing to yield-seeking investors with its higher dividend spread against 10-year MGS (Exhibit 5).

• Hektar’s FY24F distribution yield of 9.6% is attractive vs. 10-year MGS yield of 3.85%.

• We like Hektar due to:
  (i) its diverse portfolio of neighbourhood shopping centres located strategically over 4 states (Selangor, Melaka, Johor and Kedah) in Peninsular Malaysia;
  (ii) most of its retail malls (Kulim Central, Central Square and Wetex Parade) have a more consistent customer base since they are either the only mall in that particular town or the dominant shopping centre; and
  (iii) its strategic collaboration with Frasers Centrepoint Trust will help Hektar expedite acquisition plans, work on joint venture prospects, obtain financial assistance and leverage on synergies in skills, experience and retail connections.

Source: AmInvest Research - 29 Aug 2023