Parkway Life REIT - CIMB Research 2017-01-25: Added boost from asset disposal gains in FY17

PARKWAYLIFE REIT C2PU.SI

Parkway Life REIT - Added boost from asset disposal gains in FY17

4Q and FY16 DPU were in line with expectations at 25.2% and 99.8%, respectively, of our full-year forecast.
Singapore hospitals delivered improved revenue and NPI yoy in FY16, while new acquisitions and higher rent from existing properties boosted Japan performance.
PREIT intends to distribute S$5.3m net asset disposal gains (from the sale of four nursing home properties in Japan) in FY17F.

Parkway Life REIT (PREIT) reported yoy higher 4QFY16 revenue and NPI of S$27.7m/S$25.6m.
Better earnings performance by Singapore and Japan nursing homes was partly offset by lower contributions from Malaysia and Japan pharmaceutical due to a one-off marketing commission paid for the renewal of a lease that expired in Dec 16.
Reported 4Q/FY16 DPU of 3.06/12.12 Scts both declined 9% yoy due to the absence of divestment gains.
On like-for-like basis, 4Q/FY16 DPU would have been 2.2%/2.7% higher yoy.

Singapore contributed S$62.4m, the bulk of NPI (61% of total NPI) in FY16, due largely to improved performance by all three Singapore hospitals.
While Mount Elizabeth and Gleneagles Hospital were pegged to a CPI plus 1% growth formula, Parkway East enjoyed base plus adjusted hospital revenue in 3QFY16.

Japan enjoyed a 16% rise in NPI to S$39.6m in FY16, thanks to new acquisitions, higher rent from existing properties and appreciation of the ¥. However, this was partly offset by lower NPI from the pharmaceutical products distribution and manufacturing facility (due to the payment of a one-time marketing commission for the renewal of its lease that expired in Dec 16), as well as the loss of income following the sale of four nursing home properties on 22 Dec for S$48.9m.

Looking ahead, we believe that PREIT still has one of the most resilient income structures in the Singapore REIT sector, with its deflation-protected Singapore revenue stream and defensive long-term lease structure in Japan.
In addition, its balance sheet remains strong, with gearing of 36.3% and low 1.4% effective cost of debt. Following the sale of the four Japan assets, PREIT intends to distribute the $5.3m net disposal gain to unitholders in FY17F.

We adjust our DPU estimates for FY17-18 by -2% to 3%, factoring in the distribution of divestment gains in FY17F and income vacuum from asset sale in FY18F.
We roll over our DDM projections and hence, our DDM-based target price is raised by 1.9% to S$2.58.
Maintain Add.
A potential key catalyst is the redeployment of capital into new acquisitions.
Risks include a low-inflation environment, coupled with slow demand for healthcare services, which would translate into a modest earnings outlook for PREIT.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-01-25

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.58 Up 2.530