Parkway Life REIT - CIMB Research 2017-07-25: Staying On Growth Path

PARKWAYLIFE REIT C2PU.SI

Parkway Life REIT - Staying On Growth Path

PREIT’s 1H17 DPU of 6.6 Scts makes up 48.2% of our FY17 forecast, in line with our expectations and consensus.
We expect Singapore contributions to enjoy stronger rental growth with the minimum guaranteed rent growth revised from 1% to 1.27% in 23 Aug 17 to 22 Aug 18.

PREIT posted 2Q17 DPU of 3.32 Scts, +10.3% yoy, boosted by improved portfolio performance, contributions from Japanese properties acquired in Feb 17 and the payout of divestment gains of S$1.35m.
Excluding divestment gains, DPU would have increased by 2.9% yoy.
1H17 DPU of 6.6 Scts is 10% above the previous corresponding period.

Singapore revenue rose 1.7% yoy to S$16.5m while NPI improved 1.3% yoy to S$15.7m on the upward minimum guarantee rent revision of 1%.
Management stated that PREIT’s minimum guaranteed rent growth has been revised to 1.27% for the period 23 Aug 17 to 22 Aug 18, given that the Singapore CPI has picked up. This will likely translate into a potentially stronger 2H performance.

Meanwhile Japan revenue rose 1.2% yoy to S$11.1m and Japan NPI was up 2% yoy to S$10.1m, with a full quarter’s contribution from five properties purchased in Feb 17.
With a long lease structure and a weighted average lease term to expiry of 13.53 years for the Japan portfolio, we expect organic growth from this segment to remain relatively stable.

PREIT’s balance sheet remains strong with a gearing of 37.4% and no refinancing needs till 2019. This translates into potential debt headroom of S$77m-244m, assuming gearing of 40-45%. This puts the trust in a strong position to tap inorganic expansion.
With funding cost dipping to 1.1% as at end-2Q (from 1.4% in 1Q), we think interest cost savings would likely feature in 2H.
In addition, its yen-denominated net income has been fully hedged till 1Q20.

We tweak our FY17-19 DPU estimates slightly to account for the new minimum guaranteed rent growth formula. We continue to like PREIT for its earnings stability, resilient rent structure and downside protection for 95% of its gross revenue.
We maintain our Add call with an unchanged DDM-based target price of S$2.83.
Upside risk could emerge should PREIT tap acquisition growth opportunities.
Downside risk could come from a prolonged weak yen (beyond 1Q20).

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-07-25

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