Parkway Life REIT - UOB Kay Hian 2019-04-29: 1Q19 Consistent & Steady Execution; Sound Capital Management

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

Parkway Life REIT - 1Q19: Consistent & Steady Execution; Sound Capital Management

  • PARKWAYLIFE REIT (SGX:C2PU) achieved a steady increase in DPU of 3.5% y-o-y in 1Q19, benefitting from a contribution from a Japan property acquired in 1Q18, upward revision of the minimum guaranteed rent for Singapore hospitals of 1.38% and appreciation of the Japanese yen.
  • ParkwayLife REIT benefits from growth in the healthcare industry due to ageing populations in Singapore and Japan.
  • Maintain BUY. Target price: S$3.25.



1Q19 RESULTS

  • PARKWAYLIFE REIT (SGX:C2PU)'s results are in line with our expectations. DPU grew by 3.5% to 3.28 S cents in 1Q19, representing 24.5% of our full-year estimate.

Steady, resilient and sustainable growth.

  • Revenue grew 2.1% y-o-y due to:
    1. revenue contribution from a Japan property (Konosu Nursing Home Kyoseien) acquired in 1Q18,
    2. upward revision of minimum guarantee rent for Singapore hospitals, namely Mt Elizabeth Hospital, Gleneagles Hospital and Eastshore Hospital, by 1.38% effective 23 Aug 18, and
    3. appreciation of the Japanese yen. NPI grew in tandem at 2.2% y-o-y. Interest expenses were flat at S$1.7m. Distributable income grew 3.5% y-o-y.

Proactive management of interest rate risk and foreign exchange risks.

  • ParkwayLife REIT successfully refinanced and termed out all its Japanese yen loans due in 2020, using the proceeds from two 6-year term loan facilities amounting to ¥7,898m (S$96.6m). It has lowered its effective all-in cost of debt from 0.97% to 0.91% despite extending its debt maturity profile to 2025. ParkwayLife REIT’s interest cover ratio remains very healthy at 13.2x.
  • 88% of ParkwayLife REIT’s interest rate exposure is hedged. Its net income in Japanese yen is fully hedged till 1Q23.

Ample debt headroom.

  • ParkwayLife REIT’s gearing remained healthy at 36.4%. It has debt headroom of S$295.4m to finance acquisition before gearing hits regulatory limit of 45%.


STOCK IMPACT

  • ParkwayLife REIT continues to demonstrate steady increase in DPU driven by organic growth and new acquisitions. The REIT is exploring opportunities to grow via acquisitions, while recycling capital to optimise returns:

Growth through acquisitions.

  • ParkwayLife REIT is scouting for opportunities to acquire hospitals in developed and mature markets with many profitable hospital operators. Management sees opportunities to expand into Malaysia and Australia.
  • Sponsor IHH HEALTHCARE BERHAD (SGX:Q0F), 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.
  • ParkwayLife REIT is well positioned to acquire these scarce and tightly-held healthcare assets.

Recycling of Japan portfolio.

  • ParkwayLife 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. ParkwayLife REIT could consider divesting P-Life Matsudo pharmaceutical products distributing and manufacturing facility to recycle capital for higher-yielding new investments.

Strong defensive qualities.

  • ParkwayLife 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.

  • 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/ 2019-04-29
SGX Stock Analyst Report BUY MAINTAIN BUY 3.250 SAME 3.250



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