Buy Al-‘Aqar Healthcare REIT for Stable Halal Income
This Malaysian manager of medical real estate pays reliably and has growth plans to boot.
My original top list of halal dividend stocks, Tayyib 20, did not include any Malaysian companies — despite the fact that many are simultaneously Shariah compliant and high-yielding — due to the absence of ratings by Sustainalytics, proxied for environmental, social and governance credentials. Since then I have stopped using Sustainalystics (given its manifest disregard for ethical principles), so Malaysian halal dividend stocks will be getting more spotlight on Tayyib Finance from now on, with my own assessment of their sustainability profiles whenever necessary.
Al-‘Aqar Healthcare REIT (KLSE:5116)
Market cap: MYR1.1b (US$210m)
Dividend yield: 6.2%
Valuation: P/B 1x
I often mention that property investing is innately Islamic because it confers ownership of physical assets. Real estate investment trusts (REITs) specifically make commercial property more accessible to retail investors.
In Malaysia, five out of 19 REITs on Bursa Malaysia (previously KLSE) are Shariah compliant (see Investing in Malaysian REITs for Halal Income). Among them, ALAQAR became the very first publicly traded Islamic REIT listed as early as 2006.
Its initial portfolio of six properties has grown to 24 in healthcare and wellness industries, mostly hospitals across Malaysia belonging to KPJ Healthcare Berhad, the largest private provider in the country. At end-2023, the total portfolio value stood at MYR1.6b.
The REIT is managed by Damansara REIT Managers Sdn Bhd which is a subsidiary of Johor Corporation, a government-linked company. More than 80% of shares are owned by institutional investors, the biggest chunks by state agencies such as Lembaga Tabung Haji (a hajj pilgrimage fund), Permodalan Nasional Berhad (the national investment fund) and Kumpulan Wang Persaraan (a retirement fund for public employees). Their holdings are a testament to the reliability of Al-‘Aqar Healthcare REIT as a source of halal investment income.
Performance
Although the historical charts of the REIT do not show obvious signs of growth, its performance has been sturdy enough to support stable payouts. Profitability remains high, with margins in the high sixties (excepting a couple of years during Covid-19).
In the latest financial year, revenue increased by 10% and profit marginally, by 1%. In the same period, key tenant KPJ grew revenue and profit by 19% and 63% respectively — impressive results for a year in which economic growth (projected at around 4.5%) slowed down compared to 2022 (7.8%). Healthcare being a non-cyclical industry has stayed resilient, buoyed by rising consumer confidence in Malaysia. The government’s commissioning of private healthcare providers to support increasingly crowded public hospitals is another tailwind.
Like earnings, dividends have not followed a clear upward trend. Still, save for 2020, distributions have increased from 7.70 sen per unit maintained between 2015 and 2018 to 7.90 sen in 2023, set at a record payout ratio of 100% (above the normative 95%). The current dividend yield of 6.2% is the highest among Islamic REITs in Malaysia.
Takeaway
Al-‘Aqar Healthcare REIT is a standout because of its niche in medical real estate and the highest dividend yield. Importantly, the payouts are well-covered by cash flows.
2024 is shaping up to be a good year for the REIT, with fresh lease renewals and an optimistic outlook for healthcare. There is growth to come too: the manager is embarking on a five-year strategic plan meant to expand the portfolio with more productive assets, at home and abroad.
At MYR1.28 per share and a price-to-book ratio of 1x, Al-‘Aqar appears fairly valued. Regardless, the price movement is limited, and it is well worth the money of Muslim investors looking for a dependable source of halal income.
Disclaimer: Nothing you read on Tayyib Finance constitutes financial advice. Nor is there a guarantee of Shariah compliance of any particular stock at any particular time, since ‘Shariah compliance’ is fluid depending on the provider of judicial opinion and must be regularly affirmed. Do your own research.