Target Price: MYR1.46
Poised For Growth
HEKT’s 2QFY13 net profit was in line with expectations. The growth in its 1HFY13 net profit was boosted by contribution from its new Kedah malls. Major refurbishment plans for Central Square have been finalised and works will be completed by end-2014. We maintain our NEUTRAL call on the stock. Despite HEKT’s consistent dividend, rising bond yields will likely exert pressure on sector valuations.
• Results in line. HEKT’s 2QFY13’s net profit of MYR10.8m (+16.5% y-oy; -2.2% q-o-q) were in line with expectations. The incremental earnings contribution from its two Kedah malls led to 1HFY13 net profit growing 15.1% y-o-y to MYR21.9m (1HFY12: MYR19.0m). Overall portfolio occupancy remained stable at 94.2%. YTD rental reversion was healthy at 8% for the 5% of net lettable area (NLA) renewed thus far. HEKT announced a DPU of 2.6 sen during the quarter, bringing total 1HFY13 DPU to 5.2 sen.
• Central Square’s turnaround plan on track. HEKT has finalised its major turnaround plans for Central Square Shopping Complex (CS) in Sg Petani, Kedah. Total refurbishment cost for CS has been revised upwards to MYR23m (from MYR19m). Refurbishment plans include the expansion of its cinema and the conversion of empty spaces into new retail areas. This exercise is slated for completion at end-2014. CS will continue to operate as normal, although occupancy could dip during the renovation period. The capex will be funded through bank borrowings.
Although the additional debt will increase gearing to 0.43x, from 0.41x currently, we believe this level is still manageable, as the positive revaluation for CS’ post-refurbishment will help to pare down HEKT’s long-term gearing. We are positive on this refurbishment exercise, as it is expected to boost CS’ average rental rates by at least 20%. Rental rates are currently at about MYR2.00-MYR3.00 per sq ft.
• Risks. Risks to our view include a fall in bond yields.
• Maintain NEUTRAL. No changes to our earnings forecasts. We maintain our NEUTRAL call on HEKT with an unchanged FV of MYR1.46. Although the REIT’s dividend payout will likely remain consistent, the rising bond yield environment will continue to exert downward pressure on the valuations of the REIT sector
Publish date: 06/08/13