AL-Aqar Healthcare Reit - Results in-line, positive outlook remains with potential asset injections HOLD

- We re-affirm our HOLD recommendation on Al-Aqar Healthcare REIT, with a higher fair value of RM1.45/unit vs. RM1.39/unit previously, based on our DCF valuation as we roll forward our valuation.

- Full-year realised net profit of RM53mil was in-line with our estimates making up 99%, but below consensus at only 77%.

- The group declared a final distribution of 4.54 sen/share, bringing the total for FY12 to 7.8 sen/share, representing a 100% payout ratio. This translates into a 6% yield. The group remains committed to pay at least DPS 6.5 sen/share.

- The core underlying strength in FY12’s net profit (+38% YoY, +59% QoQ) were attributed to new rental income from Jeta Gardens, Kluang Utama Specialist and Bandar Baru Klang Specialist. Distributable income on a sequentially basis fell 16% due to the fair value adjustment recognised in 4Q.

- We project earnings to increase by 9% each for FY13F-FY14F and by 5% for FY15F. Six properties are up for renewal this year with another five in the following year. This is based on the formula of the10-year MGS+238bps, multiplied by the market value of the property.

- The REIT will be undertaking a new Sukuk Ijarah programme of up to RM1.0bil by 2Q. This is to refinance the existing debt, and fund future acquisitions and working capital.

- Some hospitals – Damansara Specialist, Ampang Puteri and Selangor Specialist – are undergoing further expansion. Cost is borne by KPJ Healthcare (KPJ Mk Equity, BUY) with no rental contribution to the REIT.

- Despite our positive stance of potential asset injections to come on board this year, no projection has been included yet. Some of the completed and near-completed KPJ hospitals include Sabah Medical Centre, KPJ International College, Sibu Specialist, Pasir Gudang, and Maharani Specialist.

- In light of the successful penetration into aged-care and retirement healthcare industry in Australia, we believe Al’-Aqar is on a constant lookout for similar accretive assets. This, in turn, would enable the REIT to be less reliant on one source of income, which is from KPJ.

- Moving forward, we see acquisitions from:- (1) KPJ’s network of assets; and (2) Third-party acquisition of aged-care and retirement villages given the increasing demand for these properties.

- Positive and favourable prospects for Al’-Aqar remain intact, underpinned by a reputable sponsor and single tenant risk – KPJ. Our HOLD will turn positive upon a clear visibility of constructive acquisitions.

Source: AmeSecurities