- Following a meeting with management, 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 is a fundamentally stable REIT with downside protection led by long leases and MGS-linked rental reviews with guaranteed rental escalation from its sponsor, KPJ Healthcare.

- Notably, potential acquisition from its sponsor, KPJ Healthcare is the catalyst to drive DPU growth.

- However, asset injection from the sponsor is unlikely to materialise in the near term given the infancy stage of KPJ’s new hospitals. KPJ has a sizeable pipeline of 10 hospitals (current and upcoming). We reckon the asset injections could materialise earliest in FY17.

- We do not preclude the possibility of a near-term nonhospital related acquisition as there is no downtime needed for such an acquisition. We understand that the extension (Phase 2 and 3) of KPJ University College in Nilai, Negeri Sembilan, is expected to be completed by this year.

- Moving forward, management highlighted that new rental lease agreement for new acquisitions will be CPI linked. At present, its rental lease agreements are MGS linked, with the exception of Jeta Gardens’.

- Recall that Al’-Aqar announced the disposal of Selesa Tower in Johor Bahru for a cash consideration of RM112mil, on 28 February. The gain is estimated at RM21.5mil. The proceeds will be used for working capital and repayment of bank borrowings.

- Gearing currently stands at 46%, as at end-1QFY14. After the divestment of Selesa Tower (expected completion by 2QCY14), gearing is expected to reduce to 41%.

- We have only factored in organic growth (through rental escalation of 2% p.a.) and master lease renewal with sponsor. Note that bulk of its properties (16) is due for renewal in FY15. We are maintaining our earnings projection for now, pending completion of the divestment of Selesa Tower.

- Our HOLD call is largely premised on the lack of near-term acquisitions to re-rate the stock. It is currently trading with a distribution yield of 5.7%, translating into a yield spread of 160bps.

Source: AmeSecurities