INVESTMENT HIGHLIGHTS

• FY18 earnings within expectation

• Lower sequential earnings due to higher expenditure

• Steady earnings on yearly basis

• FY19 estimate revised & FY20 forecast introduced

• Maintain BUY with a revised TP of RM1.49

FY18 earnings within expectation. Al-‘Aqar Healthcare REIT (Al- ‘Aqar) FY18 core net income of RM61.0m came in within our expectation, making up 100% of our full year forecast.

Lower sequential earnings due to higher expenditure. Al-‘Aqar recorded marginally higher topline of RM25.9m (+1.1%qoq) in 4QFY18. Nevertheless, core net earnings were lower on sequential basis at RM13.7m (-9.5%qoq), mainly due to higher trust expenditure (+5.6%qoq). The increase in trust expenditure was mainly due to higher maintenance fee for properties (+65.7%qoq). Meanwhile, gearing of Al- ‘Aqar increased marginally to 0.38x in 4QFY18 from 0.37x in 3QFY18.

Steady earnings on yearly basis. Al-‘Aqar recorded higher core net income of RM13.7m (+1.9%yoy) in 4QFY18, bringing cumulative earnings in FY18 to RM61m (+2.0%yoy). The marginal earnings growth in FY18 was contributed by higher rental income and rental contribution from a newly acquired car park block at KPJ Selangor Specialist Hospital.

FY19 estimate revised & FY20 forecast introduced. Our FY19 core net income estimate was revised marginally by +0.6% post-release of FY18 full year figures. We also introduce our earnings forecast for FY20. Net income in FY20 is expected to be driven by rental renewal of five hospitals.

Maintain BUY with a revised TP of RM1.49. We revised our TP for Al-‘Aqar to RM1.49 (from RM1.45) as we roll over our base year. Our target price is based on DDM valuation. We like Al-`Aqar for: i) its unique positioning as a defensive healthcare REIT in Malaysia, and ii) stable earnings growth and low earnings downside risk. Distribution yield of Al-`Aqar is estimated at 5.3%.

Source: MIDF Research - 21 Feb 2019