Is Al-Aqar Healthcare REIT Worth Investing In?

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Listed on 10 August 2006, Al-Aqar Healthcare REIT (Al-Aqar) is the first and only Islamic Healthcare REIT to be listed on Bursa Malaysia. Beginning with an initial portfolio of six properties, Al-Aqar is deriving recurring income from a portfolio of 19 hospitals and 3 healthcare properties in Malaysia and Australia worth RM 1.46 billion as at 30 September 2018.

In this article, I’ll revisit its fundamentals, bring an update on its latest financial results and assess its investment potential at its current unit price. Hence, here are 5 things to know about Al-Aqar before you invest.

#1: Latest Financial Results

Overall, Al-Aqar has delivered stable gross revenue and distributable income to its unitholders. Evidently, I found that revenue in Q1 2016 has fallen marginally to RM 26.4 million from RM 27.6 million in Q1 2015. It is due to its disposal of 2 properties in Indonesia. Meanwhile, revenue in Q1 2017 has dipped marginally to RM 24.9 million from RM 26.4 million in Q1 2016. It is due to its disposal of a property known as Selesa Tower.

Since Q1 2017, Al-Aqar has recorded small gradual increments in revenues and distributable income. This is contributed by annual increment received from its hospitals and additional rental income received from a carpark block located at KPJ Selangor Specialist Hospital which was acquired in Q4 2017.

For the last 12 months, Al-Aqar has generated RM 101.5 million in revenue and RM 60.8 million in distributable income. Out of which, it has distributed a gross distribution per unit (DPU) of 7.65 sen in that 12-month period. Hence, Al-Aqar has sustained its DPU at 7.60 – 7.70 sen per annum since 2014.

Figures in RM ‘000 unless stated otherwise

Period	GrossRevenue	DistributableIncome	DPU (Sen)
Q4 2017	24,777	13,444	n/a
Q1 2018	25,545	16,743	3.95
Q2 2018	25,585	15,445	1.75
Q3 2018	25,623	15,140	1.95
Total	101,530	60,772	7.65

Source: Al-Aqar’s Quarterly Reports

#2: Balance Sheet Strength

As at 30 September 2018, Al-Aqar has total borrowings of RM 573.5 million and thus, having a gearing ratio of 36.64%.

#3: Lease Structure

Al-Aqar’s properties are leased under a long-term lease agreement with a term of 15 years and an option for renewal for another 15 years upon expiry. Review on these leases are carried out once in every three years, thus, providing stable rental reversions to its unitholders.

#4: Sponsor Strength

KPJ Healthcare Bhd is the sponsor and the largest unitholder of Al-Aqar with as much as 37.19% unitholdings. As such, Johor Corporation (JCorp) is the biggest ultimate unitholder of Al-Aqar due to its interest in KPJ Healthcare Bhd. Hence, it enables Al-Aqar to work closely with KPJ Healthcare Bhd in terms of injection of new healthcare assets into Al-Aqar over the mid-to-long term.

KPJ Healthcare Bhd is a leading healthcare group listed on Bursa Malaysia with a network of 25 hospitals in Malaysia. Recently, it added and will add a handful of new hospitals into its pipeline. They include:

– KPJ Perlis Specialist Hospital (Opened on 17 May 2018)

– KPJ Bandar Dato’ Onn Specialist Hospital, Johor Bahru (Opening in Q4 2018)

– BDC Kuching Specialist Hospital, Kuching (Opening in 2019)

– KPJ Miri Specialist Hospital, Miri (Opening in 2019)

#5: Stock Valuation

As I write, Al-Aqar is trading at RM 1.31 an unit.

(1) Gross Dividend Yield

In Point 1, Al-Aqar had declared 7.65 sen in gross DPU. Thus, its gross dividend yield is 5.84% per annum. It is above its 5-Year Average of 5.45% per annum.

Key Statistics (3 January 2019):  

5-Year Gross Dividend Yield Range: 4.90% – 5.90%

5-Year Gross Dividend Yield Average: 5.45%

Current Gross Dividend Yield: 5.84%

(2) Net Dividend Yield

According to regulations, an individual investor, Malaysian and foreigners, are entitled to receive a netted DPU after a deduction of 10% withholding tax from gross DPU declared by a Malaysia-listed REIT. Hence, an investor would receive approximately 6.89 sen in net DPU, working out to be 5.26% per annum in net dividend yields based on current unit price of RM 1.31.

(3) P/B Ratio

As at 30 September 2018, Al-Aqar has net assets of RM 1.256 an unit. Hence, it has a current P/B Ratio of 1.04, the lowest in 5 years.

Key Statistics (3 January 2019):  

5-Year P/B Ratio Range: 1.16 – 1.32

5-Year P/B Ratio Average: 1.21

Current P/B Ratio: 1.04

VIA’s Verdict

Let us do a quick comparison with two more healthcare REITs listed on the SGX namely, ParkwayLife REIT and First REIT.

REITs	Al-Aqar	ParkwayLife	First
Properties	22	50	20
Main Locations	Malaysia	Singapore & Japan	Indonesia
Valuation	RM 1.46 billion	S$ 1.75 billion	S$ 1.35 billion
Current Price	RM 1.31	S$ 2.62	S$ 0.98
P/B Ratio	1.04	1.49	0.97
Net Dividend Yields	5.26%	4.87%	8.80%
Sponsor	KPJ Healthcare	Khazanah	Lippo Karawaci &OUE Lippo Healthcare

In a glance, it seems like First REIT is the obvious candidate among the 3 REITs as it has the lowest P/B Ratio and is offering the highest net dividend yields at its current price. However, you would have been investing in REITs in Malaysia and Singapore for some time, you would also have known that First REIT’s unit price had been battered down recently as it was affected by weaknesses from Lippo Karawaci as it was hit by bribery investigations and multiple downgrades in credit ratings by Moody’s, S&P, and Fitch in 2018.

More due diligence on both Lippo Karawaci and OUE Lippo Healthcare, I think, is necessary if you wish to consider an investment in First REIT.

Meanwhile, between Al-Aqar and ParkwayLife, both have their key advantages and disadvantages as follows:

1. Al-Aqar is trading at more attractive valuation figures (P/B Ratio and as well as net dividend yields) as compared to ParkwayLife.
   
   
2. Al-Aqar’s sponsor, KPJ Healthcare Bhd, has capabilities in development of hospitals. Khazanah, the sponsor of ParkwayLife, is a sovereign fund of the Malaysian Government.
   
   
3. ParkwayLife has delivered slow and stable growth in DPU over the past 10 years. Al-Aqar, however, failed to do so.
   
   
4. ParkwayLife is looking into Japan for future growth. Al-Aqar would stay local and would keep its investment activities mostly in Malaysia.

Which of the three do you prefer? You call the shots.

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