INVESTMENT HIGHLIGHTS

• A defensive healthcare REIT

• Asset acquisition to expand portfolio

• Stable earnings in 1HFY18

• Steady earnings outlook

• Initiate Coverage with BUY Call and TP of RM1.45

A defensive healthcare REIT. Al-`Aqar Healthcare REIT (Al-`Aqar) is the world’s first listed Islamic Healthcare REIT and it is also the only healthcare REIT in Malaysia. Al-`Aqar is supported by its sponsor - KPJ Healthcare Berhad. As at Dec 2017, Al-`Aqar’s properties comprise of 19 hospitals and 3 healthcare related properties in Malaysia and Australia with total portfolio value of RM1.46b. In terms of geographical exposure, 21 out of the 22 assets are located in Malaysia while the remaining one asset is located in Australia.

Asset acquisition to expand portfolio. Al-`Aqar is looking to expand portfolio via asset acquisition. Asset acquisitions in the pipeline are KPJ Batu Pahat (RM70m), KPJ Kluang (RM80m) and KPJ Segamat (RM70m). The asset acquisitions are expected to take place within the next two years. Aside from asset acquisitions, Al-`Aqar is also looking at building ambulatory care centre and hospital expansion projects (Ampang Puteri Specialist and Penang Specialist) to expand their portfolio.

Stable earnings in 1HFY18. FY17 core net income of RM59.9m was weaker by 2.7%yoy, in line with weaker topline (-4%yoy) mainly due to loss of income from Selesa Tower. Meanwhile, earnings in 1HFY18 were stronger at RM32.3m (+10.3%yoy), supported by renewal of leases, rental contribution from car park block at KPJ Selangor Specialist Hospital (acquired in December 2017) and lower sukuk financing cost.

Steady earnings outlook. We expect Al-`Aqar core net income to grow 1.4%yoy in FY18 assuming stable rental reversion of +2% per annum. Nevertheless, we forecast FY19 earnings to be flattish as we expect higher refinancing cost of sukuk to offset the higher rental income. Meanwhile, distribution per unit (DPU) of Al-`Aqar is expected to remain stable which translates into net dividend yield of 5.7%.

Initiate Coverage with BUY call and TP of RM1.45, based on Multi Stage Dividend Discount Model (Required rate of return: 7.2%, Perpetual growth rate: 2.2%). We like Al-`Aqar for: i) its unique positioning as a defensive healthcare REIT in Malaysia, ii) stable earnings growth and low earnings downside risk and iii) its distribution yield of 5.7% is slightly higher than peer’s average of 5.6%.

Source: MIDF Research - 31 Oct 2018