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

- Al-‘Aqar reported 1QFY14 realised net profit of RM14.8mil (+6% YoY) and DPU of 3.99sen. The result was largely within expectation, comprising 27% of our full-year estimates and 23% of consensus.

- Net property income’s increase of 0.8% YoY was mainly driven by the yearly increment (2% escalation) of rental income.

- Total asset value as at end-1QFY14 stood at RM1.5bil, with 25 properties under its portfolio. Portfolio occupancy remained strong at 100%.

- In this financial year, only one property – Jeta Garden – is due for lease renewal in November. Al-‘Aqar will see bulk of its properties (16 out of 25 properties) up for lease renewal in FY15.

- The average cost of debt at currently stands at 4.8%, with 89% of its total debt under a fixed rate. With these structures in place, we expect Al-‘Aqar to be well shielded from any potential hikes in interest rates.

- On 28 February, Al’-Aqar announced the disposal of Selesa Tower (integrated commercial development comprising a hotel and an office block) in Johor Bahru for a cash consideration on RM112mil. This exercise is expected to be completed by 2QCY14.

- We are neutral on this exercise given the estimated gain of RM21.5mil and that the proceeds would be used to reduce it’s gearing level (optimal gearing of 40%). Gearing currently stands at 46%. Our FY14 estimates does not account for the gain on disposal. We believe that this would eventually be passed on in the form of higher DPU.

- Acquisition-wise, things will likely remain quiet. KPJ Healthcare’s new hospitals are still in the infancy stage.

The earliest injection of KPJ’s new hospitals is envisaged to only happen in FY17, in our view. This is because its new hospitals require at least 3 years to break even.

- Thus far, only three KPJ’s hospitals are not injected into the REIT, namely Pasir Gudang Hospital, Sabah Medical Centre, and Rawang Specialist. Another six new hospitals will be opened by FY17.

- At the current level, the stock is trading at a distribution yield of 5.9%. Our HOLD is premised on the lack of nearterm accretive acquisition.

Source: AmeSecurities