This article first appeared in The Edge Financial Daily on July 22, 2019

Al-’Aqar Healthcare REIT
(July 19, RM1.50)
Downgrade to neutral with an unchanged target price (TP) of RM1.49: Al-’Aqar Healthcare REIT is expected to release its second quarter of financial year ending 2019 (2QFY19) earnings in August. We estimate its first half-year (1HFY19) earnings to come in largely within our expectation due to its stable earnings track record.

Rental income growth is expected to remain positive. We expect Al-’Aqar to record higher rental income in 1HFY19 mainly due to rental contribution from KPJ Healthcare University College (KPJUC) and rental income increments. Recall that Al-’Aqar settled balance purchase consideration for KPJUC in November 2018, hence Al-’Aqar has started receiving 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 its sukuk in May 2018 at higher rates. Furthermore, Al-’Aqar has also obtained Murabahah Tawarruq, a new Islamic financing facility, in November 2018.

Al-’Aqar’s rental income going forward is expected to be driven by rental reviews. We gather that one asset will be under rental review in 2019 while six others will due in 2020. Meanwhile, Al-’Aqar’s asset expansion plans include future acquisition of KPJ Healthcare Bhd’s hospitals, establishing wellness centres and senior living care, and venturing into business opportunities within the healthcare value chain.

We make no changes to our earnings forecast for financial year ending 2019 and 2020 forecasts (FY19/20F). Our TP for Al-’Aqar is also maintained at RM1.49, based on dividend discount model valuation. Nevertheless, we downgrade our call on Al-’Aqar to “neutral” from “buy” due to limited upside. Note that the counter’s share price has gained 21% since our initiation report on Oct 31, 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, the distribution yield of Al-’Aqar tapered to 4.7% following its share price gains. — MIDF Research, July 19