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

- Al-Aqar’s 9MFY13 realised net profit is within our expectation, accounting for 75% of our full-year estimates.

- Realised net profit rose by 5% mainly attributed to new rental contribution (7.4% of rental income) from Bandar Baru Klang Specialist Hospital, which was acquired in June 2012.

- Despite having a single tenant risk, i.e. KPJ Healthcare, its assets portfolio continues to enjoy 100% occupancy and collection.

- Therefore, we expect Al-‘Aqar to continue charting decent growth via rental renewals and rental escalation.

- Total value of Al-‘Aqar’s asset currently stands at RM1.46bil, comprising 25 hospitals.

- The group’s growth potential remains strong, in our view, given the healthy pipeline of yield accretive acquisition of hospitals within KPJ network and its aggressive expansion.

- With KPJ on track in its bed capacity expansion plans, we believe that an asset injection will likely materialise next year, in light of KPJ’s asset-light business model to fuel future aggressive expansion.

- At the same time, the group is also eyeing third-party acquisitions to accelerate growth trajectory instead of solely relying only on its sponsor. These are likely to be retirement homes in Australia, similar to Jeta Gardens.

- Gearing is comfortable - below the 50% regulatory benchmark. Al-‘Aqar offers an attractive forward yield of >6%.

- We maintain our EPU numbers and HOLD recommendation until clearer visibility of construction acquisition.

Source: AmeSecurities