Al-'Aqar Healthcare REIT reported a mixed performance in its first half of FY24, with core net income reaching RM31.7 million, slightly below expectations as it accounted for only 44% of the full-year forecast. The shortfall was primarily due to higher-than-expected trust expenses in the second quarter. Al-'Aqar also announced a second interim distribution per unit (DPU) of 1.9 sen, bringing the total DPU to 3.8 sen for the first half of the year.

Analysts from MIDF Stock Broking House have maintained a NEUTRAL rating on Al-`Aqar Healthcare REIT, though the target price (TP) has been slightly revised downwards to RM1.29 from RM1.31. The adjustment reflects concerns over increased expenses, particularly higher professional fees and maintenance costs, which have weighed on the REIT's earnings. Despite this, the REIT's stable performance, bolstered by its resilient healthcare assets in Malaysia, provides some support to the current valuation.

In the second quarter of FY24, Al-`Aqar's core net income fell by 6.6% quarter-on-quarter to RM15.3 million due to a 6% increase in trust expenses. Year-on-year, the core net income for the second quarter remained relatively flat, resulting in a cumulative decline of 2.5% for the first half of FY24. This decline was in line with a 0.6% drop in topline revenue, attributed to lower rental income from the Australia division, while contributions from Malaysian healthcare assets remained steady.

Despite these challenges, the REIT benefited from a reduction in Islamic financing costs, which decreased by 3.9% year-on-year following the redemption of RM100 million in Revolving Credit-i in April 2023. This reduction helped to partially cushion the decline in earnings.

Looking forward, the earnings forecast for FY24F/25F/26F has been revised downwards by 9.5%, 9.4%, and 8%, respectively, to account for the higher trust expenditures. Nonetheless, the earnings growth for Al-`Aqar is expected to remain stable, supported by lease renewals of its healthcare assets with an annual growth rate of approximately 2%. The REIT is currently in the process of renewing leases for five existing KPJ properties, which is expected to be finalised by year-end. Given the defensive nature of the healthcare industry, rental income from these assets is anticipated to remain stable.

Source: MIDF
Title: Earnings Dragged by Higher Expenses