Hektar Reit (OSK Research) maintain buy; target price RM .37

Hektar REIT

Annualised Earnings Almost Spot On

There were no major surprises in the 3Q10 results announced last week. Its annualised 9M10 net earnings were almost spot on with our forecast and in line with consensus estimates. 9M10 turnover and net profit improved by 3% and 4% respectively on higher turnover rent collected from tenants as well as the impact of conforming to FRS 117. The 2.5 sen interim dividend was within our expectation. We maintain our TP at RM1.37, based on targeted dividend yield of 8.0%. Maintain BUY.

No major surprises. 9M10 turnover and net profit improved 3% and 4% respectively owing to:

(i) higher turnover rent arising from improved retail sales by its tenants, which signifies much improved consumer spending during the quarter;
(ii) implementation of FRS 117, which required Hektar to recognise rental income receivable under tenancy agreements by making provision for average step-up rent over the tenancy period, which gave rise to an additional earnings contribution of RM1.1m in 9M10; and
(iii) lower than expected borrowing cost in 9M10. Overall, a good set of results. With the exception of Subang Parade, all its other malls - Mahkota Parade and Wetex Parade - reported improved performance. Since its reopening post-refurbishment in May 2010, Mahkota Parade posted a +1% in rental rate reversions in 3Q10 (and +7% in 2Q10, although overall 9M10 was still down by 5%). Its occupancy rate also stabilised at 96.7%. The refurbished mall now stands a much better chance of competing with its neighbouring rivals. Wetex Parade is still undergoing rigorous transformation since it was acquired in mid-08, chalking up +18% in rental rate reversions (9M10: +14%) and a further improvement in occupancy rate to 94.4% (vs 92.2% in 2Q10).

The marginal blip experienced by Subang Parade since the recent opening of Empire Shopping Gallery nearby, began to somewhat stabilise in 3Q10. Its occupancy rate remained at 94.8% in 3Q10, although rental rate reversion continued to drop by a further 4% (overall it fell 3% for 9M10). As we mentioned before, the ‘destablisation’ of the Subang retail market after the opening of Empire Shopping Gallery is likely to be short-lived. The management has been quick in finding another anchor tenant to operate an 8-screen
cinema covering over 20,000 sq ft in Subang Parade in the space vacated by Toys’ R’ Us.

The cinema is targeted for opening by mid-11. Reiterate BUY. We reiterate our BUY call on Hektar REIT based on its still attractive dividend yield of 8.5%. We continue to value the stock at RM1.37, based on a targeted  dividend yield of 8.0%.