Al-Aqar Healthcare Reit - Stable rental growth, backed by KPJ Healthcare’s expansion BUY

- We initiate coverage on Al-‘Aqar Healthcare REIT with a BUY rating and a fair value of RM1.39/unit based on a 10% discount to its DCF value of RM1.55/unit. Taken together with the DPU estimate of 7.8 sen for FY12F, our fair value implies a total return of 16% on the current price.

- Al’Aqar is 49%-owned by KPJ Healthcare (“KPJ”), which is the largest private healthcare operator in Malaysia with 2,600 beds. KPJ is expected to aggressively expand  its portfolio of hospitals. Al-‘Aqar has alsoconsistently paid out 99% of its distributable income for the last 5 years. 

- Al-‘Aqar has expanded its portfolio from 6 hospital buildings to 24 properties within 5 years. It has made its foray into the Australian aged care and retirement industry by acquiring Jeta Gardens for RM131mil. The acquisition yield is circa 6.5% (after tax), which is accretive to the overall DPU.

- KPJ has other hospitals which can potentially be injected into Al-‘Aqar. Rental income for Al-‘Aqar is very resilient and stable, underpinned by a market review every 3 years with a guaranteed escalation of 2% annually. This sponsor structure offers stability to the revenue growth trajectory and hence, the REIT’s attractiveness.

- Al-‘Aqar has also been given the right of first refusal (“ROFR”) to a pool of hospitals, locally or overseas, from KPJ. Its acquisition pipeline is looking strong with the ROFR to KPJ’s upcoming hospitals. We assume it would acquire at least two hospitals each in FY13F and FY14F from KPJ for about RM100mil. Management has indicated that they will be exploring third party acquisitions, moving forward.

- We are forecasting a net property income growth of 13% and 8% as well as DPU of 7.8 sen and 7.9 sen, respectively, for FY12F and FY13F, underpinned by organic growth and acquisitions.

- At the current moment, net gearing is estimated to  be manageable at 45% for FY12F. In our earnings forecast, we have taken into account the proposed issuance of 56.4mil new units (+9%) to be completed by 2HFY12.

- We believe that the value of Al-‘Aqar and its sponsor, KPJ, may be boosted by the imminent listing of Khazanah Nasional Bhd’s Integrated Healthcare holdings, which may drive a sector wide re-rating. As it is, KPJ is already trading at a steep discount to its regional peers.

- Al-‘Aqar has a projected yield of 6.4% for FY12F and a 272 basis point spread over the 10-year Malaysian Government Securities (MGS) yield of 3.68%; hence, our BUY rating.  

Source: AmeSecurities