Al-Aqar Healthcare REIT - Acquisition likely to kick in next year

-  Following a company visit, 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, given the limited upside to our fair value.

-  On the back of our rental growth assumption of 13% for FY12F, our estimated EPU growth is about 2.5%. Based on a dividend payout ratio of 97%, this translates into a distribution yield of 5.3%.

-  Despite having the majority of assets located primarily in Malaysia, Al-‘Aqar has successful made an international footprint in Indonesia and subsequently, in Australia since FY10. Management is gradually moving away to be less reliant on KPJ-built hospital and plans to expand to other international markets underpinned by the rising healthcare industry. 

-  Apart from injecting KPJ-built assets (seven upcoming hospitals by FY15 and expansion of five hospitals – 18 months to two years for completion), we understand that management is eyeing to accelerate its acquisition pipeline in aged-care and retirement homes in Australia given the success of Jeta Garden and rising demand of these properties via third party acquisitions. This, we believe, is a positive as rental revisions for these assets will be based on the prevailing market value, rather than the rental revision formula used for assets located in Malaysia. As it is, rental income received from Jeta Gardens is based on a triple net lease at 8.5%. Management intends to embark on a similar structure for its future acquisition in similar assets. 

-  Furthermore, the REIT is not exposed to any foreign currency risk for cross border transactions. Acquisitions and rentals received are denominated in ringgit, whereby currency risk is borne fully by the vendor.

-  Historically and in most cases, acquisitions are funded by a combination of cash via borrowing and placement of units to the vendor with a 50:50 ratio. As of FY11, gearing stood at 46%, which is close to the 50% threshold. Moving forward, the funding structure for future acquisitions will differ slightly from the past, with less reliance on borrowings and to incorporate equity funding.  Hence, we expect to see more units to be issued in tandem with future acquisitions and enlargement of market capitalisation. Also, this would help the REIT to better manage gearing to 40%, in line with management guidance. 

-  As the bulk of its borrowings, circa RM650mil, is expiring next year February, Al-‘Aqar will undergo a refinancing exercise via issuance of a RM1bil sukuk programme.

-  In our view, it is highly unlikely for any constructive acquisition this year. Although yields have compressed to 5.3% given its lofty valuation, we believe that growth remains positive and intact underpinned by its reputable sponsor and single tenant risk, KPJ Healthcare. We opine that next year should be fairly interesting as we anticipate acquisitions to kick in given that three hospitals by KPJ Healthcare (Table 1) is expected to complete this year.   

Source: AmeSecurities