Hektar  REIT’s  2QFY14  earnings  came  in  line  with  expectations. Although  revenue  growth  continued  to  be  disrupted  by  Central Square’s ongoing revamps, management still declared a decent DPU of 2.60 sen. Earnings growth is expected to remain flattish in 2HFY14 due to ongoing refurbishments, although  DPU is expected to remain at 10.5 sen for FY14. Maintain NEUTRAL and DDM-based FV of MYR1.43.

Results in line.  Hektar REIT’s 2Q14 earnings of MYR11.5m (6.1% y-oy,  9.7% q-o-q) came in line with our  estimates.  Its revenue growth was flattish  as  it  continued  to  be  affected  by  disruptions  from  Central Square’s (CS) ongoing asset enhancement initiatives (AEI). Net property income (NPI)  margin  improved during the quarter to  61.7% (from 58.3%in  1QFY14)  due  to  some  writebacks  in  some  provisions.  Given  the improvement in NPI, net profit margin also improved to 38% (from 34.7% in 1QFY14).  It has  announced a DPU of  2.60  sen, on track to meet our full-year forecast.  Its  overall portfolio occupancy  is still  stable at 94.4%, and average rental reversion is about 5% YTD. 

Growth to remain flattish in 2HFY14.  Hektar  REIT  continues to make good progress on the  AEI  front. The AEI for CS  is expected to be fully completed  by year-end.  Currently,  CS’ occupancy is at  84.2%, although this is expected to improve to above 90% once the works are completed.We  believe  that  the  full  impact  from  this  refurbishment  should  only  be seen from  1QFY15 onwards. Mahkota Parade’s AEI, which will see the expansion  of  its  cinema  to  10  screens  (from four  currently),  is  already underway.  This  exercise  should  take  about  six  months  to  complete.Given  all these exercises, management has guided for flattish earnings growth in FY14, although FY15 should see an improvement in earnings.Nonetheless,  management has reaffirmed its commitment to maintain a 
DPU of at least 10.5 sen for FY14. 

Earnings  forecasts.  We  trim  our  FY14/15  EPU  forecasts  slightly  by 2.4/1.0%,  after revising some of our revenue assumptions.  However, we are maintaining our FY14 DPU forecast of 10.5 sen.

Maintain  NEUTRAL.  Our  DDM-based  FV  is  unchanged  at  MYR1.43. Given Hektar  REIT’s past track record, we  remain  confident  in  its DPU delivery.

Source: RHB