Parkway Life REIT - CIMB Research 2017-11-09: Downgrade On Valuation

PARKWAYLIFE REIT C2PU.SI

Parkway Life REIT - Downgrade On Valuation

Parkway Life REIT (PREIT)’s 9M17 DPU of 9.97 Scts was in line at 72.8% of our FY17 forecast, and with consensus.
The performance was boosted by stronger Singapore contributions on higher minimum rent guarantee and weaker yen drag on overseas earnings.
Gearing was healthy at 37.3% while net income hedge was extended to 1Q22.

We downgrade PREIT from Add to Hold with a slightly higher target price of S$2.93.

PREIT reported 3Q17 DPU of 3.37 Scts, up 10.1% yoy and +1.5% qoq.
Performance was boosted by stronger Singapore operations and lower interest expense, partly offset by the depreciation of the Japanese yen. There was also a payout of S$1.35m of asset divestment gains. Excluding the payout, DPU would have increased 2.8% yoy.
9M17 DPU of 9.97 Scts makes up 72.8% of our FY17 forecast, within our expectations.

Singapore revenue increased 1.5% yoy to S$16.7m while NPI rose 1.3% yoy to S$15.9m on the upward minimum guarantee rent revision of 1.27% for the period of 23 Aug 17 to 22 Aug 18.
Meanwhile, Parkway East Hospital also did better as its adjusted hospital revenue for the period of 23 Aug 16 to 22 Aug 17 had also outpaced its minimum guaranteed rent.

Japan revenue and NPI fell marginally yoy to S$10.9m/S$9.9m due largely to the depreciation in Japanese yen, despite a higher property base from assets acquired in Feb 17.
During the period, PREIT completed two asset enhancements on two properties, Sanko and Kikuya Warakuen. Following the cost outlay of ¥11m (S$0.13m), the rent for the two properties would increase by 0.63-1.07% (or an ROI of 8%) for the remaining lease term of c.29 years.

PREIT has further extended its yen-denominated net income hedge for another two years till 1Q22. Balance sheet remains healthy with a gearing of 37.3% and no refinancing needs till 2019. This translates into potential headroom of S$78m-245m, assuming gearing of 40-45%.
Its interest rate exposure is largely hedged with all-in interest cost at 1.1%. This puts the trust in a strong position to tap inorganic expansion.

We leave our FY17-19 DPU estimates unchanged but raise our DDM-based target price to S$2.93 on lower cost of equity assumption of 6.6% (vs. 6.76% previously).
While we still like PREIT for its earnings stability with no downside risk for 95% of its gross revenue, share price had outperformed significantly in recent months.
At 4.3-4.4% FY18- 19 DPU yield and total return of < 5%, near term valuations appear stretched. Hence, we lower our call to Hold.
Upside risk to our call would be additional accretive acquisitions.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-11-09

CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 2.93 Up 2.830