Al-Aqar Healthcare Reit - Acquiring land to expand Puteri Specialist Hospital Hold

- Al’-Aqar REIT (54.9%-owned by KPJ Healthcare) will be acquiring two pieces of land in Johor Bahru from Puteri Specialist Hospital (Johor) Sdn Bhd (“PSHSB”), a wholly-owned subsidiary of KPJ Healthcare, for a cash consideration of RM3.59mil.

- The vacant land will be used to develop a six-storey hospital building by PSHSB – situated beside Puteri Specialist Hospital, which is owned by Al’-Aqar (part of the 1st asset injection). This is to facilitate the expansion of Puteri Specialist. The said development is expected to be completed in 2QFY14. Construction is to start upon obtaining the Johor Bahru Municipal Council’s approval and be completed within two years.

- Upon completion, Al’Aqar will inject the additional hospital building into the REIT, based on a mutually agreed price by the valuer. This acquisition will clearly contribute positively to Al’-Aqar future earnings. 

- On the flipside, the said acquisition enables Al’-Aqar to charge rental on the vacant land during the construction period up till the completion of the additional hospital building. Rental will be based on the prevailing lease rental rate charged on Puteri Specialist.  Current lease rate on Puteri Specialist is 7.07% per annum for FY12.

- We are of the view that the market value of Puteri Specialist is bound to rise upon the completion of the proposed development. As such, this translates into an increase in rental income arising from Puteri Specialist (including the additional building hospital), as the renewed lease rental will be based on the market value at that point in time.

- In the event PSHSB is unable to meet its obligation to pay Al’-Aqar the lease rental on the land prior to completion of the acquisition of the  additional hospital building, KPJ undertakes to make the lease rental payment on behalf of PSHSB.  In light of this, potential earnings arising from the rental of the vacant lands are free from risk and secured.

- We maintain our HOLD rating with an unchanged fair value of RM1.39/unit. Our earnings forecasts remain unchanged at this juncture pending a discussion with management. Share price has rallied to RM1.48/unit, an appreciation of 22% since our initiation report; the projected yield stands at 5.2% each for FY12F and FY13F.   

Source: AmeSecurities