HEKTAR ... Nov11

CIMB Research Report Investment highlights

• Maintain BUY. The main positive surprise from Hektar’s analyst briefing was the significant increase in shoppers’ footfall in Subang Parade, after the opening of an 8-screen MBO cinema targeted at the young crowd. We maintain our BUY call, earnings forecasts and DDM-derived target price of RM1.50. We are encouraged by the company’s asset enhancement initiatives and like its decision to open a cinema in Subang Parade which should increase footfall and turnover. The absence of a clear acquisition pipeline points to an unexciting 3-year EPU CAGR of about 3% but this is compensated by Hektar’s above-industry-average dividend yields of about 8-9%, which are a strong attraction in volatile market conditions. Another catalyst
could be upward rental reversions in 2012 for one-quarter of its NLA.

• Cinema pulling in the young crowd. Subang Parade’s new 8-screen cinema which opened its doors on 16 Sep has already had a positive effect on shoppers’ footfall, especially with its intended target market of the youth. Consistent with the company’s aim to make the mall more youth-oriented, we understand that there are
plans to bring in more youth-oriented fashion houses and F&B outlets like Starbucks and Carls Junior.

• Utilising excess space in Mahkota Parade. Hektar is planning to add tenants to its new entertainment zone in Mahkota Parade. In the pipeline are some bistro pubs and clubs that are targeted to start business in early 2012. This will boost the mall’s occupancy rate which stood at 96.2% as at Sep 2011.

Recent developments
Hektar’s 3Q11 analyst briefing was chaired by Encik Nubly, Senior Manager for Strategy who said that Hektar was committed to paying 90% of its distributable income as dividends. We left the briefing encouraged by the various asset enhancement initiatives undertaken by the company.

Drawing the younger crowd with a new cinema. For Subang Parade, it was a strategic decision by Hektar’s management to replace Toys "R" Us with a new-screen MBO cinema that would allow it to capture the younger population of Subang Jaya who previously had to go The Summit or Sunway Pyramid in order to catch the latest movies on the screen. Since its opening on 16 Sep, we gather that it has successfully
attracted the younger crowd in the Subang Jaya vicinity. To better match the younger age profile of cinemagoers, the company intends to reposition the third floor of Subang Parade with a youthful theme. This is done by relocating some of the tenants targeting the older age group from the third floor to the second floor. The benefit of this move will be reflected in higher shoppers’ footfall and an increase in retail activities on the previously quiet third floor. There are also plans to bring in more youth-oriented fashion houses and F&B outlets like Starbucks and Carls Junior to nearby the cinema area.

Fixed or floating loan? We gathered that Hektar has received an offer to refinance its RM184m bank loan due Dec 2011 at the same floating rate (cost of funds + 0.75%). However, Hektar is still contemplating whether to borrow half the amount using floating rate while fixing the rate for the balance of the loan. Currently, the interest rate for the fixed rate loan is 40bp premium over the floating rate loan, i.e. 4.7%. We estimate an earnings setback of ~3% for our FY12 estimates and target price cut to RM1.47, if Hektar refinances wholly to a floating rate loan while an equal split between floating and a fixed rate of 4.7% would lead to an earnings cut of ~4% for FY12 and see our target price being reduced to RM1.45. We are maintaining our estimates pending finalisation of the refinancing package. Refinancing at a higher interest rate would not have any impact on our BUY recommendation.

Earnings outlook
Another 19k increase in NLA in 4Q. 4Q will see the addition of another 19k sq ft to Hektar’s existing overall portfolio NLA of 1.1m sq ft, out of which 10k sq ft will be from the opening of the eighth cinema screen in Subang Parade and 9k sq ft will come from the Market Place in Subang Parade.

Dividend on track. Hektar declared a DPU of 7.5 sen for 9M11. During the briefing, it reiterated its commitment to pay 90% of its distributable income as dividends. With 4Q11 earnings being boosted by the increase in occupancy rates for Subang Parade after the opening of the cinema and the addition of a new F&B outlet in Market Place, Hektar is on track to meet our FY11 DPU forecast of 10.8 sen.

Recommendation
Maintain BUY. We maintain our BUY call and make no changes to our earnings or DDM-derived target price of RM1.50. We are encouraged by the company’s asset enhancement initiatives and like its decision to open a cinema in Subang Parade which should increase footfall and turnover. The absence of a clear acquisition pipeline points to an unexciting 3-year EPU CAGR of about 3% but this is compensated by Hektar’s above-industry-average dividend yields of about 8-9%, which are a strong attraction in volatile market conditions. Another catalyst could be upward rental reversions in 2012 for one-quarter of its NLA.