KEY INVESTMENT HIGHLIGHTS

• 9MFY20 earnings within expectation

• Higher sequential earnings on smaller quantum of rental rebate

• Weaker earnings on rental rebate and higher financing cost

• FY20 earnings forecast tweaked higher

• Maintain Neutral with an unchanged TP of RM1.35

9MFY20 earnings within expectation. Al-‘Aqar Healthcare REIT (Al- ‘Aqar) 9MFY20 core net income of RM39.4m came in within our expectation, making up 75.5% of our full year estimate. Note that we have excluded unrealized forex gain of RM286k in our core net income calculations.

Higher sequential earnings on smaller quantum of rental rebate. Sequentially, 3QFY20 core net income was higher at RM13.6m (+41%qoq) as quantum of rental rebate for its hospital tenants was smaller in 3QFY20. Note that Al-‘Aqar provided rental rebate to tenants in 2QFY20 and subsequently extended rental rebate to tenants at a smaller quantum in 3QFY20 as imposition of Movement Control Order (MCO) and the Covid-19 outbreak hurt business of private hospitals. Looking ahead, we expect earnings of Al-‘Aqar to improve in 4QFY20 as rental rebate is likely to discontinue in view of the improved performance of KPJ hospitals.

Weaker earnings on rental rebate and higher financing cost. On yearly basis, Al-‘Aqar 3QFY20 core net income was lower at RM13.6m (- 16%yoy), bringing 9MFY20 core net income to RM39.4m (-16.7%yoy). The decline in earnings was mainly due to rental rebate for tenants in 2QFY20 and 3QFY20 which offset contribution from KPJ Batu Pahat Specialist Hospital which was acquired in December 2019. Besides, 9MFY20 earnings were also dragged by higher Islamic financing cost (+10.5%yoy) as Al-‘Aqar drawdown additional Islamic financing in December 2019.

Maintain Neutral with an unchanged TP of RM1.35. We tweak our FY20 earnings forecast by +4.6% as we expect earnings to be slightly stronger in 4QFY20 due to absence of rental rebate. Meanwhile, we keep our FY21 earnings forecast unchanged. We maintain our target price for Al-‘Aqar at RM1.35, based on Dividend Discount Model. We also maintain our Neutral call on Al-‘Aqar due to limited upside. Meanwhile, distribution yield is estimated at 4.8%

Source: MIDF Research - 27 Nov 2020