KEY INVESTMENT HIGHLIGHTS

• 1HFY24 earnings slightly below expectation
• Higher expenses in 2QFY24
• Earnings forecast revised downwards
• Maintain NEUTRAL with a revised TP of RM1.29

1HFY24 earnings slightly below expectation. Al-'Aqar Healthcare REIT (Al-'Aqar) 1HFY24 core net income of RM31.7m came in slightly below our expectation, making up 44% of our full year forecast. The negative deviation was mainly due to the higher-than-expected trust expenses in 2QFY24. Meanwhile, Al-'Aqar announced a second interim distribution per unit (DPU) of 1.9sen, bringing total DPU to 3.8sen in 1HFY24.

Higher expenses in 2QFY24. Sequentially, 2QFY24 core net income was lower at RM15.3m (-6.6%qoq) mainly due to higher trust expenses (+6%qoq) which led by the increase in professional fees. On yearly basis, 2QFY24 core net income was little changed, bringing 1HFY24 cumulative core net income at RM31.7m (-2.5%yoy). The earnings decline was in line with lower topline (-0.6%yoy) mainly due to lower rental income from Australia division while contribution from healthcare assets in Malaysia remained resilient. Besides, earnings decline was partly owing to higher maintenance fees for properties and higher professional fees.

Nevertheless, the lower Islamic financing cost (-3.9%yoy) partly cushioned earnings decline following redemption of RM100m of Revolving Credit-i in April 2023.

Earnings forecast revised downwards. We revise our earnings forecast for FY24F/25F/26F by -9.5%/-9.4%/-8% to factor in the higher trust expenditure. Nevertheless, earnings growth for Al-'Aqar is expected to be stable due to lease renewal of its healthcare assets with annual growth rate of 2%. Note that Al-'Aqar is in the midst of renewing five existing KPJ properties which will be finalized by year-end. Rental income from healthcare assets should remain stable given the defensive nature of the healthcare industry.

Maintain NEUTRAL with a revised TP of RM1.29. Corresponding to the downward revision in earnings and DPU, our TP is revised to RM1.29 from RM1.31. Our TP is based on Dividend Discount Model. Despite we see stable prospect for Al-'Aqar which is supported by its healthcare assets, we see limited catalyst in the near-term. Hence, we maintain our NEUTRAL call on Al-'Aqar. Meanwhile, net distribution yield is estimated at 5.3%.

Source: MIDF Research - 30 Aug 2024