- We reaffirm our HOLD recommendation on Al-‘Aqar Healthcare REIT with an unchanged fair value of RM1.45/unit, based on a DCF valuation, following the release of its FY13 results.

- Al-‘Aqar’s FY13 realised net profit of RM54mil came in within our expectations.

- Management declared a dividend of 3.99 sen/share, which brought FY13 dividends to 7.9 sen/share.

- Turnover and earnings expanded on the back of solid rental contributions and new rental income from Bandar Baru Klang (acquired in June 2012).

- Portfolio occupancy remained strong at 100% backed by its sponsor, KPJ Healthcare, as its single tenant.

- Total asset value as of end-FY13 stood at RM1.5bil, with 25 properties under its portfolio.

- Given the delays in new hospital opening by KPJ, no acquisition took place in FY13 for the REIT.

- On the acquisition front, things may remain quiet as KPJ prefers to inject hospitals that are operating at full capacity after 3 years-4 years.

- Furthermore, KPJ had recently raised RM1bil sukuk and appears not to be in need for cash.

- Thus far, only Pasir Gudang Hospital is not injected into Al-‘Aqar. As for FY14, KPJ expects the opening of three new hospitals, namely, Sabah Medical Centre, Rawang Specialist and Muar Specialist.

- Nevertheless, we see a strong pipeline of asset injections in the medium- to long-term upon the full ramp-up of KPJ’s bed capacities given its aggressive domestic expansion.

- In addition, the REIT had always been keen on third-party acquisition instead of being overly reliant on KPJ. This would be a positive surprise should it materialise.

- Post-result adjustments, we expect earnings to grow organically. Al-‘Aqar should continue to chart decent growth level underpinned by a stable rental income. We are introducing our FY16F distributable income at RM62mil.

- At the current levels, the stock is trading at a distribution yield of 5.9%. Our HOLD call is premised on the volatile bond market with no signs of any near-term acquisition.

Source: AmeSecurities