ALAQAR’s recent disposal of Selesa Tower has strengthened its balance sheet, allowing financing for future asset acquisitions of up to RM98m from its parent, KPJ. ALAQAR has joined the large cap MREITs club (<RM1.0b) earlier this year while its healthcare positioning and defensive nature warrants the low-end of our sizeable MREIT Fwd. gross yield of 5.1%-6.4%. Not Rated with a fair value of RM1.55 (target FY17E yield of 5.1%).

Recent disposal of Selesa Tower lightened the balance sheet and paved the way for future asset acquisition opportunities. ALAQAR recently proposed to dispose Selesa Tower for RM100m (net gain on disposal of RM11.4m, completion 1Q17). There will be a loss of c.6.8% to top line (GRI), but the disposal will help lower financing cost (by c.RM3.8m) as 80% of the proceeds will be used to pare down borrowings, lowering gearing to 0.38x (from 0.41x) while 18% (RM18m) of the proceeds is allocated for future acquisitions and working capital. This frees up c.RM98m for future acquisitions as ALAQAR can borrow up to RM70m before hitting its internal gearing limit of 0.40x, coupled with disposal proceeds of up to RM18m for future acquisitions.

Strong pipeline for asset acquisitions from parent. ALAQAR has right of first refusal (ROFR) for KPJ properties and is also keen other third party assets. KPJ is on a robust expansion phase, with plans of RM1.3b investments for up to eight new hospitals which will be ready between 2018 and 2019 while they will be spinning off their assets by mainly REIT-ing to ALAQAR.

The only MREIT with earnings downside risk capped. ALAQAR is more resilient compared to the office, retail and industrial MREITS as it caps rental reversion downsides at 7.1% of the property market value and enjoys up to 2% reversions every year. Additionally, occupancy is guaranteed at 100% as assets from its parent KPJ come with long-term leases of 15+15 years and rental reviews every 3 years, which guarantees earnings as occupancy rates are constantly at 100% during the long-term lease period

Projecting earnings of RM60.0-59.5m in FY16-17E. We expect the recent disposal to result in slightly lower earnings in FY17 (-1%) post accounting for lower GRI, and financing cost, while 4-26% of portfolio expiries in FY16-17E will see 1-2% reversion rates. We are expecting FY16-17E gross dividend yields of 4.8-4.8% (95-97% payout).

Not Rated with fair value of RM1.55. The stock has joined the sizeable MREIT club given that its market cap exceeded RM1.0b earlier this year. Its healthcare positioning and defensive nature warrants the low-end of our sizeable MREIT coverage Fwd. gross yield range of 5.1%-6.4%, resulting in an implied fair value of RM1.55 (target FY17E yield of 5.1%) suggesting that the stock may be fully valued for now. We believe ALAQAR may be worthwhile revisiting when its share price corrects as its income profile is the most resilient under our universe.

Source: Kenanga Research - 5 Dec 2016