Parkway Life REIT - CIMB Research 2018-01-26: Steadily Growing

PARKWAYLIFE REIT C2PU.SI

Parkway Life REIT - Steadily Growing

Parkway Life REIT's 4Q/FY17 DPU of 3.38 Scts/13.35 Scts was in line with our estimates.
Singapore contributions enjoyed stronger rental growth.
Japan earnings protected by ¥ income hedge.
Maintain HOLD with a higher Target Price of S$3.07.

Parkway Life REIT (PREIT) reported 4Q17 gross revenue of S$27.5m, -0.7% yoy, dragged by a depreciation in ¥ and partly offset by an upward minimum guarantee rent revision of Singapore hospitals. However, distribution income rose 10.6% yoy to S$20.5m (DPU: 3.38 Scts), thanks to an income hedge on the ¥ income, lower interest expense due to lower financing cost and distribution of divestment gains.
For the full year, DPU of 13.35 Scts met our expectation at c.98% of our FY17 forecast.

Excluding divestment gains, organic 4Q DPU growth would have been 2.8% yoy. This came from Singapore hospitals.
Singapore revenue increased 1.5% in 4Q and 1.3% for FY17 to S$16.7m/S$66.4m due to the upward minimum guarantee rent revision of 1.27% for the period 23 Aug 17 to 22 Aug 18, while Parkway East Hospital also did better as its adjusted hospital revenue for the period of 23 Aug 16 to 22 Aug 17 outpaced the minimum rent guarantee.

4Q Japan revenue and NPI fell slightly to S$10.7m and S$9.7m, respectively, on the back of a weaker ¥. This was despite having a larger portfolio of assets, acquired in Feb 17. With a long lease structure and weighted average lease term of 13.17 years, we expect organic growth from this segment to remain relatively stable.
Management indicated that it has extended the Japan net income hedge until 1Q22, thus mitigating the impact of depreciating ¥ at distribution income level.

Parkway Life REIT’s balance sheet remains strong with gearing of 36.4% and little refinancing requirements in FY18. The current all-in cost of debt is at 1%, down from 1.1% in 3Q. As such, PREIT has potential debt headroom of c.S$278m, based on the regulatory 45% leverage ceiling. This puts the trust in a strong position to tap into inorganic growth prospects.

We tweak our FY18-19 DPU down slightly post results and introduce our FY20 estimates. Hence, our DDM-based Target Price is raised to S$3.07 as we roll our estimates forward.
While we still like Parkway Life REIT for its defensive structure, share price of Parkway Life REIT has run up strongly. The REIT is now trading at 4% FY18 and 4.2% FY19 DPU yields. Hence, we retain our HOLD rating and look for opportunities to accumulate on weakness.
Upside risk could come from accretive new acquisitions or stronger-than-expected inflation estimates.
Downside risks are deflationary periods where Singapore hospital rental growth would revert to 1%.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-01-26

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 3.07 Up 2.930