Al-Aqar Healthcare - Earnings remain strong and intact Hold

HOLD
Fair Value RM1.39

Investment Highlights

• We re-affirm our HOLD recommendation on Al’Aqar Healthcare REIT, with an unchanged fair value of RM1.39/unit based on a 10% discount to our DCF value. 
• Al’-Aqar reported 2QFY12 net profit of RM14mil (QoQ: +8%), bringing 1HFY12 net profit to RM26mil (+17%). The results made up 48% of our full-year forecast and 43% of consensus. We deem the results to be in line with our expectations. Management declared a dividend of 3.26 sen/share for the period, representing a yield of 2.3%. 
• On a YoY basis, gross rental income grew 25% stemming from additional rental contributions arising from 4th and 5th asset acquisitions. These properties contributed circa 21% of rental income for the period. Meanwhile, QoQ, net property income grew marginally by 2%, backed by a slight decline in property operating cost. 
• Al’Aqar continues to enjoy 100% occupancy and collections, underpinned by its single tenant risk, KPJ Healthcare. Year-to-date, the REIT has 25 properties with a total value of RM1.45bil. 
• Its earlier proposal on the acquisition of two parcels of land in Johor Bahru for the expansion of the Puteri Specialist Hospital for RM3.59mil cash is pending KPJ Healthcare’s EGM and is expected to complete by year-end. 
• Given that rental will be charged on the vacant land during the construction phase, we have assumed a lease rental rate of 7.07% per annum for FY13F and FY14F. Hence, earnings will inch up marginally by 0.3% each for FY13F and FY14F. As the development is expected to be completed within 2 years before injection into the REIT (likely to occur in FY15), we have not taken into account any potential rental arising from the additional hospital. We maintain our assumption that Al’-Aqar would acquire at least two hospitals for each of FY13F and FY14F. 
• Nonetheless, we are positive in terms of Al’Aqar’s future asset injection backed by its strong sponsor, KPJ Healthcare. KPJ plans to build seven hospitals over the next 3 years. Therefore, we are of the view that Al’Aqar’s earnings trajectory remains strong and intact in light of the timing of these assets to be injected. 
• Additionally, apart from injecting hospitals from its sponsor, Al’- Aqar is actively looking at third party acquisitions – aged care and retirement villages in Australia, given the success of Jeta Gardens in Queensland and the rising demand of such properties. We will not be surprised by such potential acquisitions to flow in next year, given any unlikely acquisition this year. 
• Share price has appreciated 29% so far this year and yields have compressed to 5.4%. As such, we find valuation not as attractive at the current level given that share prices for M-REITs have rallied. Hence, our HOLD rating until greater tangibility is seen in earnings arising from asset injections.

Source: AmResearch