Al-Aqar Healthcare Reit - Stable rental growth, backed by KPJ Healthcare's expansion BUY

Stock Name: ALAQAR
Company Name: AL-AQAR HEALTHCARE REIT

Research House: AMMB

Price Call: BUY

Target Price: 1.39

- We initiate coverage on Al-'Aqar Healthcare REIT with a BUYrating and a fair value of RM1.39/unit based on a 10% discount to its DCF valueof RM1.55/unit. Taken together with the DPU estimate of 7.8 sen for FY12F, ourfair value implies a total return of 16% on the current price.

- Al'Aqar is 49%-owned by KPJ Healthcare ('KPJ'), which is thelargest private healthcare operator in Malaysia with 2,600 beds. KPJ isexpected to aggressively expand  its portfolioof hospitals. Al-'Aqar has alsoconsistently paid out 99% of its distributableincome for the last 5 years. 

- Al-'Aqar has expanded its portfolio from 6 hospital buildingsto 24 properties within 5 years. It has made its foray into the Australian agedcare and retirement industry by acquiring Jeta Gardens for RM131mil. Theacquisition yield is circa 6.5% (after tax), which is accretive to the overallDPU.

- KPJ has other hospitals which can potentially be injected intoAl-'Aqar. Rental income for Al-'Aqar is very resilient and stable, underpinnedby a market review every 3 years with a guaranteed escalation of 2% annually.This sponsor structure offers stability to the revenue growth trajectory andhence, the REIT's attractiveness.

- Al-'Aqar has also been given the right of first refusal ('ROFR')to a pool of hospitals, locally or overseas, from KPJ. Its acquisition pipelineis looking strong with the ROFR to KPJ's upcoming hospitals. We assume it wouldacquire at least two hospitals each in FY13F and FY14F from KPJ for aboutRM100mil. Management has indicated that they will be exploring third partyacquisitions, moving forward.

- We are forecasting a net property income growth of 13% and8% as well as DPU of 7.8 sen and 7.9 sen, respectively, for FY12F and FY13F,underpinned by organic growth and acquisitions.

- At the current moment, net gearing is estimated to  be manageable at 45% for FY12F. In ourearnings forecast, we have taken into account the proposed issuance of 56.4mil newunits (+9%) to be completed by 2HFY12.

- We believe that the value of Al-'Aqar and its sponsor,KPJ, may be boosted by the imminent listing of Khazanah Nasional Bhd'sIntegrated Healthcare holdings, which may drive a sector wide re-rating. As itis, KPJ is already trading at a steep discount to its regional peers.

- Al-'Aqar has a projected yield of 6.4% for FY12F and a 272basis point spread over the 10-year Malaysian Government Securities (MGS) yieldof 3.68%; hence, our BUY rating.  

Source: AmeSecurities