KEY INVESTMENT HIGHLIGHTS

• 1HFY20 earnings below expectation

• Earnings weighed by rental rebate

• Earnings dragged by higher financing cost

• Earnings forecast reduced

• Downgrade to Neutral from Buy with a revised TP of RM1.42

1HFY20 earnings below expectation. Al-‘Aqar Healthcare REIT (Al- ‘Aqar) 1HFY20 core net income of RM26.1m came in in below our expectation, making up only 41% of our full year estimates as earnings in 2QFY20 were weighed by rental rebate to tenants.

Earnings weighed by rental rebate. On sequential basis, 2QFY20 core net income was lower at RM10.6m (-31.9%qoq) as Al-‘Aqar provided assistance to its tenants in the form of rental rebate. Note that the Covid-19 outbreak and imposition of Movement Control Order (MCO) has hurt business of private hospitals and Al-`Aqar has granted rental rebate based on actual performance of each properties. Looking forward, management is yet to decide on the rental rebate for tenants in 3QFY20 pending monthly performance data from tenants.

Earnings dragged by higher financing cost. On yearly basis, Al- ‘Aqar 2QFY20 eased 30.7%yoy to RM10.6m, bringing cumulative earnings in 1HFY20 to RM26.1m (-16.4%yoy). The weaker earnings were mainly owing to rental rebate for tenants in 2QFY20 which offset contribution from KPJ Batu Pahat Specialist Hospital (acquired in December 2019). Besides, the lower earnings were also partly attributed to higher financing cost (+11.6%yoy) due to drawdown of additional Islamic financing in December 2019.

Downgrade to Neutral from Buy with a revised TP of RM1.42. We revise our earnings forecast for FY20/21F by -17.2%/-6.8% to factor in the rental rebate to tenants. Corresponding to the downward revision in earnings and distribution per unit, our TP for Al-`Aqar is revised to RM1.42 from RM1.52. We downgrade Al-`Aqar to Neutral from Buy due to muted earnings outlook and limited upside. Meanwhile, distribution yield is estimated at 4.4%.

Source: MIDF Research - 1 Sept 2020