HEKTAR ... Nov10

S & P Results Review & Earnings Outlook

• Hektar REIT’s 3Q10 results were within expectations. Hektar REIT posted a 1.5% YoY increase in net profit to MYR9.7 mln on the back of a 0.5% YoY rise in turnover to MYR22.7 mln. Hektar REIT has
recommended a third quarter dividend of 2.5 sen (vs. 2.4 sen in 3Q09).

• Overall, on a quarterly basis, portfolio average occupancy rate has improved slightly to 95.5% from 95.2% in 2Q10. Wetex Parade in Muar, Johor posted a higher occupancy rate of 94.4% from 92.2% in 2Q10 and 91.2% in 1Q10 respectively. Meanwhile, Subang Parade’s occupancy was largely unchanged at 94.8% vs. 94.6% in 2Q10. The drop in occupancy to 94.6% in 2Q10 from 100% in 1Q10 was due mainly to losing a couple tenants to its new neighboring shopping mall.

Mahkota Parade (Melaka)’s occupancy edged down slightly to 96.7% from 96.9% in 2Q10.

• Hektar REIT experienced a rental reversion of -1% in 3Q10, due mainly to a -4% rental reversion in Subang Parade, which in turn was caused by new competitor in the area. Nevertheless, Wetex Parade
and Mahkota Parade experienced positive 18% and 1% in rental reversions. Both Wetex Parade and Mahkota Parade will add new retail zones by early 2011 while Subang Parade will commence its new cinema project by mid-2011.

Recommendation & Investment Risks

• We maintain our Buy recommendation but raise our 12-month target price to MYR1.45 from MYR1.40. Hektar REIT’s unit price is well supported by its high dividend yield.

• Our 12-month target price of MYR1.45 is derived by applying a 5% (9% previously) discount to our DDM valuation. We lower our discount to reflect the improvement in the economy and also the low interest rate
environment. The primary assumptions behind our DDM valuation are a cost of equity of 8.3%-9.5% and DPU growth of 0%-3%.

• At the current level, Hektar REIT offers an attractive 2010 dividend yield of 8.0%. Moreover, suburban neighborhood retail properties normally enjoy more stable occupancy and rental income than other
types of commercial properties such as offices and urban retail properties. Going forward, Hektar REIT is looking to expand its investment portfolio, and also to enhance its existing properties through refurbishment or building extension.

• Risks to our recommendation and target price are: (i) a sharp and prolonged economic slowdown in Malaysia; and (ii) an unexpected rise in interest rates, which will have a negative impact on the occupancy,
rental income and market value of retail properties.