RHT Health Trust - DBS Research 2017-05-24: Lacks Near Term Earnings Drivers

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RHT HEALTH TRUST RF1U.SI

RHT Health Trust - Lacks Near Term Earnings Drivers

• 4Q17 DPU fell 41% y-o-y from sale of assets and impact from demonetisation.
• On comparable basis, 4Q17 DPU fell 19% y-o-y.
• Occupancy rate lower at 71% offset by higher ARPOB.
• Net service fee margins impacted by cost pressures.

Maintain Hold rating with TP of S$0.85 

• We maintain a HOLD rating and TP of S$0.85 on RHT Health Trust (RHT). 
• While we are positive on RHT’s expansion plans in the long term and exposure to the growing demand for healthcare services in India, we believe the loss of income from the sale of FHTL (Fortis Hospotel Limited) has yet to be fully priced in. However, media reports of a potential privatisation has kept share price above NAV (1.06x).

FY17 DPU in line. 

• RHT’s FY17 DPU (excl special dividend) fell 23% y-o-y due to the disposal of its 51% interest in FHTL, in line with our FY17 estimates. 4Q17 DPU fell 41% y-o-y to 1.12 Scts due to the disposal. 
• On a comparable basis, 4Q17 DPU fell 19% y-o-y, largely impacted by demonetisation policy which affected hospital income and occupancy rate despite higher Average Revenue per operating bed (ARPOB). 
• FY17 net service fee margins fell from 68% to 64% on cost pressures.

Debt headroom to support development initiatives. 

• RHT still has ample debt headroom of S$325m. 
• Its gearing is among the lowest in the S-REIT/property business trust space. This allows RHT to easily support its expansion plans and/or pursue accretive acquisitions including 
  1. ongoing development projects at BG Road and Ludhiana, adding 279 beds by FY17/18, and 
  2. planned asset enhancement initiatives at various clinical establishments, adding 272 beds over FY18/19.

WHAT’S NEW

FY17 results in line 

• FY17 DPU from sale of 51% in FHTL and impact from demonetisation. 
• RHT’s 4Q17 DPU fell 41% y-o-y to 1.12 Scts mainly due to the loss in income contribution from the sale of its 51% interest in FHTL (Gurgaon and Shalimar Bagh Clinical Establishments). 
• Following the sale, RHT declared and paid a special dividend of 24.8 Scents in Oct 2016. On a comparable basis, 4Q17 DPU fell 19% y-o-y mainly due to the Indian banknote demonetisation which impacted hospital income and occupancy rates, mitigated by 3% higher ARPOB.
• FY17 DPU (excl special dividend) fell 23% y-o-y due to the partial disposal mentioned above, in line with our FY17 estimates.
• Net property income (NPI) in 4Q17 increased 5% y-o-y to S$11m, largely due 4% y-o-y revenue growth led by higher variable fees from higher operating revenue recorded by Fortis Healthcare. 
• FY17 NPI fell 4% led by higher expenses (+6%) mainly from higher doctor charges (+15%) and hospital expenses (+4%). 
• FY17 net service fee margins fell from 68% to 64%. However, 4Q17 on a q-o-q basis was flat at 63%.
• ARPOB increased 1% q-o-q at INR14.4m while occupancy rates fell further to 71% from 75% in 3Q17. The higher ARPOB was led by high value operations especially in Oncology and Orthopedic. However, the impact of the increase in ARPOB was offset by lower occupancy rates due to the demonetisation policy. The number of operational beds was stable y-o-y at 2.6k beds.
• Gearing inched up marginally to 20.5% (3Q17: 19.9%). Due to the appreciation of INR, hedging costs has been low at 5% in FY17.

Outlook. 

• Management expects its two hospitals that are under development, Ludhiana (79 beds) and BG Road (200 beds), will be completed soon. Negotiations are ongoing to finalise the Hospital and Medical Services Agreement. 
• Management believes the BG Road Brownfield Clinical Establishment could pick-up faster than Ludhiana Clinical Establishment which is a greenfield development.

Hedging policy reduced to 50% from 100%. 

• Following the reduction in dividend policy to 95%, management had previously announced the reduction in its hedging policy on its cashflows from India to 50% from 100%. This was executed for its latest 6-month forward hedging to Dec 17 which was contracted at a rate of INR50.23. This allows investors to benefit from the strengthening of INR (current rate at INR47.63). However, this increases its exposure to forex fluctuations.

Maintain Hold on TP of S$0.85. 

• We maintain our Hold rating and target price of S$0.85. In Mar17, Bloomberg reported a potential privatisation of RHT by its sponsor, Fortis Healthcare.
• We believe the potential privatisation of RHT (if any) would likely be part of a whole scheme of a potential takeover of Fortis Healthcare, which has been up for sale in the market for a while. 
• Potential interested bidders for Fortis Healthcare includes TPG Capital, IHH, KKR & Co, Bain Capital and General Atlantic.

Key Risks to Our View: 

• The key risk to our neutral stance is stronger than expected earnings and/or INR. Additional upside could also arise from acquisitions.

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-05-24

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.850 Same 0.850