INVESTMENT HIGHLIGHTS

• Purchase KPJ Batu Pahat for RM78m

• Gearing expected to increase to 41%

• Neutral on acquisition due to minimal immediate earnings accretion

• Maintain Neutral with an unchanged TP of RM1.49

Purchase KPJ Batu Pahat for RM78m. Al-‘Aqar Healthcare REIT (Al- ‘Aqar) has bought KPJ Batu Pahat Specialist Hospital from Johor Land Bhd for RM78m. Following which, the property will be leased back to KPJ Healthcare Bhd for RM4.8m per year for the first three years and is subjected to a 10% increase every 3 years. The lease period is for 6 years, with an extended lease for a period of eight successive three terms that shall be automatically renewed. The deal is expected to be completed by the end of 2019. The 7-storey hospital has a gross floor area of 16,132.05 sq m and sits on a land measuring 20,235.5 sq m. It can house 60 beds with an additional 30 beds for future expansion.

Gearing expected to increase to 41%. Al-‘Aqar intends to fund the acquisition through a new Islamic financing facility. Following the purchase, its gearing is expected to increase to 41.1% from 38.2%. We think that the gearing level is still manageable as it is still way below the 50% gearing level set by SC.

Neutral on acquisition due to minimal immediate earnings accretion. Although the acquisition is yield accretive, we are neutral at this juncture due to the minimal earnings impact in the near-term. This is mainly due to the rise in finance cost that is likely to offset the additional income from the new asset for FY20F. Based on our estimates, FY20F core net income is expected to grow by 0.6% to 1.2% depending on the interest cost for the new facility while revenue is expected to climb 4.57% to RM109.9m.

Maintain Neutral with an unchanged TP of RM1.49 pending completion of the deal. Our DDM valuation (required rate of return of 7.2%, terminal growth rate of 2.2%) is unchanged. 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 following the increase in unit price. Hence, we maintain our NEUTRAL recommendation at the moment. Distribution yield of Al-`Aqar is estimated at 4.6%.

Source: MIDF Research - 27 Aug 2019