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

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.
  • Japan income continues to benefit from acquisition boost.
  • Lower interest cost could likely result in interest savings in 2H.
  • We maintain our Add call with a DDM-based Target Price of S$2.83.

2QFY17 results highlights 

  • 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 to enjoy higher minimum guaranteed rent growth 

  • 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.

Japan income boosted by new acquisitions 

  • 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.

Strong balance sheet, no refinancing till FY19 

  • 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.

Maintain Add 

  • 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
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.830 Same 2.830