HEKTAR ... Sep10

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 estimates. 1H10 turnover and net profit improved 4% and 7% respectively due to 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 2.4 sen. We maintain our TP at RM1.37 and our BUY call.

No major surprises. There were no major surprises in Hektar’s 2Q10 results. Its annualised 1H10 net earnings were almost spot-on with our forecast and almost in line with consensus estimates. 1H10 turnover and net profit improved by 4% and 7% respectively due to: (i) higher turnover rent arising from improved retail sales by its tenants, which reflected stronger consumer spending during the quarter; (ii) implementation of FRS 117, which required Hektar to recognise rental income receivable under tenancy agreements,
with provisions for step-up rents on an average basis over the period of tenancy, resulting in additional earnings contribution of RM0.7m in 1H10; and (iii) lower borrowing cost in 1H10.

Overall, a good set of results. Except for Subang Parade, its other malls - i.e. Mahkota Parade and Wetex Parade - reported much better performance. Since its re-launching postrefurbishment 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 96.9%. The refurbished mall now stands a much better chance of competing against its nearby rivals. Wetex Parade is still undergoing a rigorous transformation since it was
acquired in mid-08, reporting a +19% in rental rate reversions in 2Q10 (1H10: +12%) and a further improvement in occupancy rate to 92.2% (vs 91.2% in 1Q10). Subang Parade, on the other hand, experienced a marginal blip in 2Q10 since the opening of neighbouring 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 also fell very marginally by 2% in 2Q10. This is likely to continue to have marginal impact on the performance of Subang Parade in the short term. However, the ‘destablisation’ of the Subang retail market as a result of the opening of Empire Shopping Gallery is likely to
be quite short-lived, as we explain in detail in the following page. The management is finalising plans for the space vacated and will make an announcement soon.

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%.