INVESTMENT HIGHLIGHTS

• Expect 2QFY19 core net earnings to come in within expectation

• Rental income growth to remain positive

• Top-line growth to support by rental review

• Earnings forecast maintained

• Downgrade to Neutral from Buy with an unchanged TP of RM1.49

Expect 2QFY19 core net earnings to come in within expectation. Al-‘Aqar Healthcare REIT (Al-‘Aqar) is expected to release its 2QFY19 earnings in August. We estimate 1HFY19 earnings to come in largely within our expectation due to its stable earnings track record.

Rental income growth to remain positive. We expect Al-‘Aqar to record higher rental income in 1HFY19 mainly due to rental contribution from KPJUC and from rental income increments. Recall that Al-‘Aqar settled balance purchase consideration for KPJUC in November 2018 hence Al-‘Aqar started to receive full rental income from the asset. Nevertheless, we estimate 1HFY19 earnings to be marginally lower mainly due to higher Islamic financing cost as Al-‘Aqar refinanced Sukuk in May 2018 at higher rates and Al-‘Aqar has also obtained new Islamic financing facility, Murabahah Tawarruq in November 2018.

Top-line growth to support by rental review. Rental income of Al- ‘Aqar going forward is expected to be driven by rental review. We gather that one asset will be under rental review in 2019 while six assets will be under rental review in 2020. Meanwhile, asset expansion plans of Al- ‘Aqar include future acquisition of KPJ hospitals, establishing wellness centres and senior living care, and venturing into business opportunities within the healthcare value chain.

Downgrade to Neutral from Buy with an unchanged TP of RM1.49. We make no changes to our earnings forecast for FY19/20F. Our TP for Al-‘Aqar is also maintained at RM1.49, based on DDM valuation. Nevertheless, we downgrade our call on Al-‘Aqar to Neutral from Buy due to limited upside. Note that share price of Al-‘Aqar gained 21% since our initiation report on 31st October 2018. While we continue to like Al-‘Aqar as a defensive healthcare REIT in Malaysia with stable earnings, we think that positives have been largely priced in at the moment. Meanwhile, distribution yield of Al-`Aqar tapered to 4.7% following the gains in share price.

Source: MIDF Research - 19 Jul 2019