PP10551/10/2010(025682)

5 August 2010

MALAYSIA EQUITY
Investment Research
Daily News
1HFY10 Results Review
Mervin Chow Yan Hoong
+60 (3) 9207 7668
mervin.chow@my.oskgroup.com Hektar REIT
Annualised Numbers Almost Spot On
BUY  There were no major surprises in Hektar’s 2Q10 results. Its annualised 1H10 net
earnings were almost spot-on with our forecast and in line with consensus
Target RM1.37
Previous RM1.37 estimates. 1H10 turnover and net profit improved 4% and 7% respectively due to
Price RM1.27 higher turnover rent collected from tenants as well as the impact of FRS 117.
Consequently, the interim dividend of 2.5 sen was also higher compared to 2Q09’s of
REAL ESTATE INVESTMENT TRUST 2.4 sen. We maintain our TP at RM1.37 and our BUY call.
Hektar REIT is Malaysia’s first retail-focused
Real Estate Investment Trust. The trust now
has 3 suburban malls in its portfolio, namely No major surprises. There were no major surprises in Hektar’s 2Q10 results. Its
– Subang Parade, Mahkota Parade and annualised 1H10 net earnings were almost spot-on with our forecast and almost in line with
Wetex Parade.
consensus estimates. 1H10 turnover and net profit improved by 4% and 7% respectively
Stock Statistics due to: (i) higher turnover rent arising from improved retail sales by its tenants, which
Bloomberg Ticker HEKT MK reflected stronger consumer spending during the quarter; (ii) implementation of FRS 117,
Share Capital (m) 320.0 which required Hektar to recognise rental income receivable under tenancy agreements,
Market Cap (RMm) 406.4
52 week H│L Price (RM) 1.30 1.04 with provisions for step-up rents on an average basis over the period of tenancy, resulting
3mth Avg Vol (‘000) 110.1 in additional earnings contribution of RM0.7m in 1H10; and (iii) lower borrowing cost in
YTD Returns 13.4
1H10.
Beta (x) 0.60

Major Shareholders (%) Overall, a good set of results. Except for Subang Parade, its other malls - i.e. Mahkota
Frasers Centrepoint Trust 31.1 Parade and Wetex Parade - reported much better performance. Since its re-launching post-
Hektar Premier S/B 27.3
Hektar Black S/B 12.7 refurbishment in May 2010, Mahkota Parade reported a +7% in rental rate reversions in
2Q10 (although overall 1H10 was still down by 8%). Occupancy also began to stabilise at
Share Performance (%) 96.9%. The refurbished mall now stands a much better chance of competing against its
Month Absolute Relative nearby rivals. Wetex Parade is still undergoing a rigorous transformation since it was
1m 3.3 -2.3
3m 2.9 0.4 acquired in mid-08, reporting a +19% in rental rate reversions in 2Q10 (1H10: +12%) and a
6m 13.8 -0.6 further improvement in occupancy rate to 92.2% (vs 91.2% in 1Q10). Subang Parade, on
12m 26.5 -0.1
the other hand, experienced a marginal blip in 2Q10 since the opening of neighbouring
6-month Share Price Performance Empire Shopping Gallery. The departure of one of its anchor tenants, Toys’ R’ Us, and 2
other tenants caused the occupancy rate to fall to 94.6% from 100%. Rental rate reversions
1.30
also fell very marginally by 2% in 2Q10. This is likely to continue to have marginal impact
1.25
on the performance of Subang Parade in the short term. However, the ‘destablisation’ of
1.20 the Subang retail market as a result of the opening of Empire Shopping Gallery is likely to
1.15 be quite short-lived, as we explain in detail in the following page. The management is
1.10
finalising plans for the space vacated and will make an announcement soon.
1.05
Jan-10 Feb-10 Mar-10 Apr-10 Jun-10 Jul-10
Reiterate BUY. We reiterate our BUY call on Hektar REIT based on its still attractive
dividend yield of 8.7% versus the sector’s 8.5%. We continue to value Hektar REIT at
RM1.37, based on a targeted dividend yield of 8.0%.

FYE Dec (RMm) FY07 FY08 FY09 FY10f FY11f

Revenue 78.3 84.1 87.7 87.8 89.8
Reported Net Profit 80.5 60.4 37.1 39.3 40.6
Distributable Net Profit 36.7 36.2 36.7 39.3 40.6
% chg y-o-y - -1.2 1.4 7.0 3.2
Consensus - - - 39.9 41.7
EPS (sen) 25.2 18.9 11.6 12.3 12.7
DPS (sen) 10.7 10.2 10.3 11.0 11.4
Dividend yield 8.4 8.0 8.1 8.7 9.0
PER (x) 5.0 6.7 10.9 10.3 10.0
BV/share (RM) 1.17 1.26 1.27 1.28 1.30
P/BV (x) 1.1 1.0 1.0 1.0 1.0
ROE 43.0 15.5 9.2 9.6 9.8
ROA 27.4 9.1 4.9 5.1 5.2

OSK Research | See important disclosures at the end of this report 1

 OSK Research

Results Table (RMm)

Q-o-Q YTD YTD Y-o-Y
FYE Dec 2Q10 1Q10 Comments
chg FY10 FY09 chg

Revenue 22.20 23.0 -3.6% 45.2 43.6 3.7% Higher 1H10 y-o-y, primarily due to: (i) higher
turnover rent; and (ii) implementation of FRS 117
which contributed additional RM0.7m in 1H10. Lower
q-o-q primarily due to: (i) lower turnover rent; and (i)
the loss of an anchor tenant, Toys’ R’ Us, in Subang
Parade
EBIT 11.6 12.5 -6.9% 24.0 24.2 -0.5%
Net interest -2.5 -2.4 1.8% -4.9 -6.2 -21.3%
expense
Associates 0.0 0.0 - 0.0 0.0 -
Exceptional Item 0.0 0.0 - 0.0 0.0 - No revaluation of properties in 1H10
PBT 9.1 10.0 -9.0% 19.2 18.0 6.6%
Tax 0.0 0.0 - 0.0 0.0 -
MI 0.0 0.0 - 0.0 0.0 -
Net profit 9.1 10.0 -9.0% 19.2 18.0 6.6%
EPS (sen) 2.9 3.1 -9.0% 6.0 5.6 6.6%
DPS (sen) 2.5 2.5 0.0% 5.0 4.8 4.2% Slightly higher as Hektar used to pay 2.4 sen/quarter
for the first 3 quarters before paying out whatever
remaining sum in 4Q to ensure that the dividend
payout for the entire FY is at least 90% of net income

EBIT margin 52.2% 54.1% 53.2% 55.4% A slight fall, mainly due to higher management fees
pursuant to the Trust Deed. Base fee revised to
0.35% of Gross Asset Value (previously: 0.25%) and
performance fee revised to 5% of Net Property
Income (previously: 3.5%)
NTA/share (RM) 1.28 1.28 0.3% 1.28 1.26 1.5%

The ‘Empire’ strikes Subang. The recent entry of the ≈300,000 sq ft Empire Shopping Gallery (ESG) is likely
to destabilise the retail market in the short-term as the market would have to absorb the sudden influx of retail
space. An example would be the recent relocation of Toys’ R’ Us from the Subang Parade, which used to
contribute marginally to Hektar’s earnings (2.3% of the mall’s monthly income in FY09 only), to the ESG as part
of its expansion plans, despite having to pay a higher rental rate. Two other tenants that have relocated to ESG
are London Weight Management and New York Skin. As the ESG markets itself as a ‘lifestyle’ shopping mall
with focus on the mid-high to high-end market, it will continue to attract tenants that fit into the mall’s business
model. Such tenants, who are already occupying some of the older malls in the region, however, are few in
number and the malls that offer a similar concept in the immediate vicinity of ESG are even fewer, if any.
Therefore, we believe the destabilisation will likely to be very swift and have minimal impact on the retail
market in the region.

A clearer picture will emerge if we compare the tenant mix of Subang Parade and ESG. While ESG offers the
higher-end Tangs and Charles & Keith department stores, Subang Parade offers the more affordable Parkson.
In terms of food & beverage outlets, the ESG offers the higher-end Italiannies and Chili’s while Subang Parade
has the more affordable Nando’s and Dave’s Deli, just to name a few. Subang Parade has Cold Storage
supermarket, while we have yet to notice any supermarkets in the ESG. In conclusion, as it appears for now,
the ESG focuses primarily on ‘lifestyle’ shopping experience while Subang Parade will continue to offer itself as
a convenient place for the residents in the neighbourhood to purchase their daily/weekly necessities. Over the
mid- to longer-term, older shopping malls such as Subang Parade will naturally complement the ESG rather
than compete with it. Therefore, we are quite unperturbed by the impact arising from ESG on the prospects of
Subang Parade, at least in the mid- to long-term, for now.

OSK Research | See important disclosures at the end of this report 2

OSK Research
EARNINGS FORECAST

FYE Dec (RMm) FY07 FY08 FY09 FY10f FY11f

Turnover 78.3 84.1 87.7 87.8 89.8
EBITDA 44.9 47.5 48.6 52.5 53.8
PBT 80.5 60.4 37.1 39.3 40.6
Reported Net Profit 80.5 60.4 37.1 39.3 40.6
Realised Net Profit 36.7 36.2 36.7 39.3 40.6
EPS (sen) 25.2 18.9 11.6 12.3 12.7
DPS (sen) 10.7 10.2 10.3 11.0 11.4

Margin
EBITDA (%) 57.3 56.4 55.4 59.8 59.9
PBT (%) 102.8 71.8 42.3 44.8 45.2
Net Profit (%) 102.8 71.8 42.3 44.8 45.2

ROE (%) 43.0 15.5 9.2 9.6 9.8

ROA (%) 27.4 9.1 4.9 5.1 5.2

Balance Sheet
Fixed Assets 559.4 713.4 720.0 725.0 745.8
Current Assets 28.4 24.7 57.1 49.2 30.4
Total Assets 587.8 738.1 777.1 774.2 776.2
Current Liabilities 29.4 34.5 36.8 29.8 27.8
LT Liabilities 184.0 301.5 334.0 334.0 334.0
Shareholders Funds 374.4 402.1 406.3 410.4 414.5
Gearing (%) 31.3 40.8 43.0 43.1 43.0

*FY07 Net profit is based on 15 months result.

**Reported net profits between FY07 and FY09 include exceptional gain of
RM43.8m, RM24.1m and RM0.4m from revaluation of investment properties.

***Gearing is equivalent to Borrowings over Gross Asset Value

OSK Research | See important disclosures at the end of this report 3

OSK Research

OSK Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated (NR): Stock is not within regular research coverage

All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed
will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or
financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment
decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest
and/or underwriting commitments in the securities mentioned.

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OSK Research | See important disclosures at the end of this report 4