KEY INVESTMENT HIGHLIGHTS

• Proposes private placement to raise RM50m
• Proceeds from private placement mainly for repayment of borrowings
• Minimal earnings impact from the proposed private placement
• Earnings forecast maintained
• Maintain Neutral with a revised TP of RM1.35

Proposes private placement to raise RM50m. Al-‘Aqar Healthcare REIT (Al-‘Aqar) proposes to undertake a private placement of up to 20% of its total number of units issued to raise gross proceeds of up to RM50m. The number of Al-‘Aqar units to be placed will be dependent on the issue price of placement shares which will be fixed at a later date.

Proceeds from private placement mainly for repayment of borrowings. From proceeds of up to RM50m from the proposed private placement, Al-‘Aqar earmarks RM30m which is equivalent to 60% of the total proceeds for repayment of Islamic financing. Gearing of Al-‘Aqar is expected to reduce marginally to 0.39x from net gearing level of 0.41x as of 2QFY20. Note that gearing of Al-‘Aqar increased in the recent years from net gearing of 0.37x in FY17 due to assets acquisitions which were financed by Islamic financing. Meanwhile, Al-‘Aqar earmarks RM15.3m from proceeds of private placement for future acquisitions while RM4m for capital expenditure.

Minimal earnings impact from the proposed private placement. Al-‘Aqar expects the repayment of the Islamic financing to result in cost savings of RM1.7m based on profit rate of 5.75% per annum. Earnings impact from the cost savings is expected to be minimal as we expect increase in FY21F earnings to be at ~3%. Nevertheless, earnings per unit (EPU) for FY21 is expected to be diluted by ~2.5% post private placement. Meanwhile, we make no changes to our earnings forecast pending completion of the private placement.

Maintain Neutral with a revised TP of RM1.35. We revise our TP for Al-‘Aqar to RM1.35 from RM1.42 as we reduce terminal growth rate assumption in our Dividend Discount Model (DDM) to 1.5% from 1.9% due to muted outlook for its healthcare assets. Earnings outlook for Al- ‘Aqar in FY20 is also expected to be dragged by rental assistance to hospital tenants due to adverse impact from Covid-19 pandemic. Hence, we maintain our Neutral call on Al-‘Aqar.

Source: MIDF Research - 28 Oct 2020