Parkway Life REIT - UOB Kay Hian 2019-03-18: Takeaways From Taiwan ASEAN Conference

PARKWAYLIFE REIT (SGX:C2PU) | SGinvestors.io PARKWAYLIFE REIT (SGX:C2PU)

Parkway Life REIT - Takeaways From Taiwan ASEAN Conference




WHAT’S NEW


Synergies from future collaborations with Mitsui.

  • Mitsui & Co acquired a 16% stake in IHH Healthcare from Khazanah Nasional for RM8.4b in Nov 18. Inclusive of its existing 17% stake, Mitsui has increased its stake in IHH Healthcare to 33% (Khazanah’s stake reduced from 42% to 26%).
  • Mitsui’s medium-term management plan announced in May 17 had selected healthcare as a targeted growth area. Mitsui intends to participate in Asia’s healthcare eco-system with IHH Healthcare at its core. Mitsui will support IHH Healthcare’s geographical and business expansion, including IHH Healthcare’s plan to expand in India and China.
  • With Mitsui as the largest shareholder of IHH Healthcare, there could be future collaborations between Mitsui and Parkway Life REIT in the healthcare sphere, especially in Japan.

Growth through acquisitions.

  • Parkway Life REIT is scouting for opportunities to acquire hospitals in developed and mature markets where there are many profitable hospital operators. Management sees opportunities to expand into Malaysia and Australia.

IHH, through subsidiary Parkway Pantai, operates 10 Pantai hospitals and four Gleneagles medical hospitals in Malaysia.

  • IHH Healthcare has acquired a 31% stake in Fortis Healthcare in Nov 18 and needs to devote more capex to support Fortis’ expansion in India. Thus, IHH Healthcare could raise funds by divesting its 14 hospitals in Malaysia. Parkway Life REIT is well positioned to acquire these scarce and tightly held healthcare assets.

Recycling of Japan portfolio.

  • Parkway Life REIT has conducted two rounds of asset recycling in 2015 and 2017. It has recorded divestment gains of S$14.5m in total, which were distributed to shareholders (additional DPU of 1.5 S cents in 2015 and 0.89₵ in 2017).
  • Leasehold assets have been divested and all its Japan assets are freehold assets now. Parkway Life REIT could consider divesting P-Life Matsudo pharmaceutical products distributing and manufacturing facility to recycle capital for higher-yielding new investments.

Prudent capital structure.

  • Gearing has improved by 1.6ppt q-o-q to 36.1% in 4Q18. Interest cover ratio is healthy at 13.7x. Parkway Life REIT has debt headroom of S$121.5m and S$304.8m before reaching gearing of 40% and 45% respectively. Parkway Life REIT has already completed its refinancing for borrowings due in 2019.
  • Parkway Life REIT borrows in Japanese yen to achieve a natural hedge. About 90% of its total borrowings of S$683.2m is denominated in Japanese yen. It has issued ¥3.5b of 6-year senior unsecured notes with interest rate at just 0.65%, under its multicurrency debt issuance programme, in Feb 18.

Conservative distribution policy.

  • Parkway Life REIT maintains a prudent dividend payout ratio of about 95%. It retains S$3m of distributable income per year for capex on ancillary facilities, such as lifts, escalators and chillers.


STOCK IMPACT


Support from Mitsui strengthens IHH and PREIT.

  • Sponsor IHH Healthcare is strengthened with Mitsui as its largest shareholder. Mitsui is committed to expand its healthcare businesses in Asia. There are opportunities for future collaborations between Mitsui and Parkway Life REIT in the healthcare sphere, especially in Japan.

Strong defensive qualities.

  • Parkway Life REIT is resilient due to its long weighted average lease expiry (WALE) of 7.3 years. Its Japan assets have long lease structure with WALE of 12.6 years. Income visibility is highly valued given current uncertain macro outlook and volatility in financial markets.


EARNINGS REVISION/RISK

  • We maintain our earnings forecast.


VALUATION/RECOMMENDATION


Maintain BUY.

  • We roll forward to 2019. Our target price of S$3.25 is based on DDM (required rate of return: 6.25%, terminal growth: 2.2%).


SHARE PRICE CATALYST

  • Positive newsflow on rising retail rentals, yield-accretive acquisitions, redevelopment or asset enhancement opportunities.





Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-03-18
SGX Stock Analyst Report BUY MAINTAIN BUY 3.25 UP 3.150



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