Hektar REIT (March 16, RM1.28)
Downgrade to hold at RM1.30 with fair value RM1.32: We downgrade our rating on Hektar from "buy" to "hold" with our fair value revised to RM1.32 (from RM1.23 previously), based on a 30% discount to our revised discounted cash flow valuation of RM1.89, as we roll out our valuations to FY11F. At our fair value, this translates to a yield of 8.6% and 451 basis points spread over the 10-year Malaysian Government Securities (MGS) yield of 4.09%.
While the REIT is fundamentally sound, our "hold" rating is mainly premised on the lack of news flow on the asset acquisition front. Hektar has identified a few assets to be injected into the REIT but no deal has been concluded. Management has indicated that most of the vendors are not willing to part with their assets at this juncture.
We are cautious about the competition faced by its main asset, Subang Parade — which provided 51% of the portfolio's net operating income (NOI) last year. Recall that Subang Parade suffered a 3% year-on-year drop to 7.5 million in visitor traffic in FY10 as it was affected by the opening of a new mall within the vicinity, Empire Shopping Gallery (ESG).
Although these two malls ought to complement each other, and while ESG is going through a honeymoon period — new malls tend to see strong visitor traffic in the first few months — we still believe ESG is more appealing to households within the area due to the changing lifestyle and rising disposable income.
Nonetheless, we expect visitor traffic in Subang Parade to improve with the scheduled opening of an eight-screen cinema in June this year — in time for the summer blockbusters — given that it will be the only cinema in Subang Jaya. The cinema will be taking over the space vacated by Toys 'R' Us last year.
On the flip side, we expect the performance of Mahkota and Wetex Parade to remain decent given that asset enhancements at both malls have been completed. We expect Mahkota and Wetex Parade to contribute 37% and 18%, respectively to its NOI for FY11F/FY13F, respectively.
The REIT remains sound with a healthy diversification within the portfolio. Parkson remains the largest contributor to the portfolio, contributing 11% while no other tenant contributes more than 3% to the REIT. In addition, 63% of FY11F's rental income is already secured.
We slash our earnings estimates by 9% to 11% to RM40 million to RM41 million for FY11F/FY12F and we introduce FY13F earnings at RM45 million. We have taken into account the expected inclusion of the cinema, accounting for a six-month contribution in FY11F. Our earnings for FY11F/FY12F will also be underpinned by a 4% to 8% increase in NOI for the whole portfolio. — AmResearch, Mar 16
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