- We reaffirm our HOLD recommendation on Al-‘Aqar REIT with an unchanged fair value of RM1.50/unit, based on a DCF valuation.

- Al-‘Aqar reported 4Q realised net profit of RM16mil – bringing headline realised net profit for FY14 to RM60mil (+12% YoY), which were within expectations.

- Dividend of 3.79sen/unit was declared during the quarter, bringing total dividends declared to-date to 7.65sen/unit.

- The underlying revenue strength (+1.1% YoY) was underpinned by yearly increments of rental income.

- Total asset value stood at RM1.5bil as at end-FY14, with a total of 25 properties under its portfolio.

- Occupancy rate remained strong at 100% given its single tenant, i.e. KPJ Healthcare.

- The acquisition of the extension of KPJ University for RM77.8mil is expected to be completed in 1QFY15.

- The acquisition will be funded through the following:- (1) 50% via proceeds of the proposed private placement of 31.7mil new units (RM38.9mil); (2) 25% from the deferred consideration of 15.4mil new units (RM19.5mil) to the vendor (which will eventually hold a 2% stake in the REIT); and (3) 25% from bank borrowing (RM19.5mil).

- The proposed placement will allow Al-‘Aqar to raise funds for the acquisition without compromising its gearing level. After the exercise, gearing is expected to reduce to 46%.

- Gearing as at end-FY14 stood at 46%, which is still below the 50% threshold.

- No near-term asset acquisitions from KPJ Healthcare are expected as its hospitals are still in the infancy stage.

- Therefore, we expect organic growth for Al-‘Aqar, to be underpinned by stable rental escalation.

- We estimate FY15F realised net profit to grow to RM62mil, and RM66mil in FY16F. FY17F net profit is projected at RM70mil.

- The stock is currently trading at a distribution yield of 5.6%, which is at a yield spread of 168bps against the 10- year Malaysia Government Securities. Maintain HOLD.

Source: AmeSecurities