- We re-affirm our HOLD recommendation on Al-‘Aqar Healthcare REIT, with an unchanged fair value of RM1.45/unit, based on our DCF valuation.

- Al-‘Aqar reported 1QFY13 core earnings of RM14mil, which is within expectations – accounting for 25% of our full-year forecast and 23% of consensus numbers.

- Solid earnings growth (17% YoY, 12% QoQ) was driven by new rental income contributed by Bandar Baru Klang Specialist Hospital – acquired in June 2012.

- Total asset value stands at RM1.46bil with 25 properties under its portfolio. Occupancy rate is 100%, bolstered by long term leases from its single tenant, KPJ Healthcare (BUY, FV: RM8.00/share).

- Aided by KPJ’s asset light business model to fuel future expansion, an asset injection into Al-‘Aqar is expected to materialise in the next one year. This is supported by KPJ’s aggressive expansion of another 10 hospitals by end-FY15F as well as completion or near completion of some hospitals (i.e. Pasir Gudang Specialist and Sabah Medical Centre).

- Al-‘Aqar recently completed injections were Bandar Baru Klang Specialist and Kluang Utama Specialist last year. Prior to that, the last asset injection was done in FY11.

- Given that the group is operating at close to the 50% gearing threshold, any acquisitions are likely to be partly funded by an equity issuance.

- No change to our FY13F-FY15F earnings and DPU forecasts (100% distribution payout). Al-‘Aqar is expected to continue charting decent growth from rental renewals and annual escalation. Eight properties are due for renewal in FY14F, with only one this year.

- Forward distribution yield remain fairly attractive at above 6%, with upside from the potential accretive asset injection in the immediate- to near -term arising from:- (1) KPJ network of hospitals; and (2) Third party acquisition of aged care and retirement villages, following success of Jeta Gardens, in view of the rising demand of such properties in Australia.

- On a side note, the stock is a great play in the Asian healthcare theme given that healthcare properties provide a stable income stream and annual rent escalations.

- Underpinned by a positive and bright prospect ahead that is backed by KPJ, we will turn more positive on the stock upon clarity and visibility of acquisition kicking-in.

Source: AmeSecurities