Parkway Life REIT - UOB Kay Hian 2020-01-29: Wuhan Coronavirus Places Premium On Quality Private Healthcare

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

Parkway Life REIT - Wuhan Coronavirus Places Premium On Quality Private Healthcare

  • Government hospitals could be swamped with confirmed and suspected cases, resulting in stretched queue time. To cut risk of exposure to the Wuhan coronavirus, well-heeled patients could choose to seek treatment at private hospitals instead. Thus, the outbreak of Wuhan coronavirus could inadvertently improve profitability for private healthcare operators, which augurs well for ParkwayLife REIT (SGX:C2PU) as it negotiates for lease extension for its three Singapore hospitals.
  • Maintain BUY. See Parkway Life REIT Target Price.



WHAT’S NEW


Wuhan coronavirus more contagious.

  • According to China’s National Health Commission, Wuhan coronavirus is more infectious as carriers can transmit the disease during the incubation period when they exhibit no symptoms. Thus, the disease can be passed between people without them realising.

Government hospitals spearhead fight against Wuhan coronavirus.

  • Most Singaporeans are likely to seek admission at the Accident & Emergency (A&E) departments of government hospitals where cost of treatment is more affordable, should they exhibit symptoms of Wuhan coronavirus. Singapore has seven confirmed cases of Wuhan coronavirus. They are currently warded at isolation rooms at SGH, TTSH, NCID, SKH and CGH. If the outbreak of Wuhan coronavirus persists for an extended period of time, government hospitals would be swamped with many confirmed and suspected cases. Their bed capacities would be substantially utilised, resulting in stretched queue time.

Diversion of well-heeled patients to private hospitals.

  • Patients who could afford private healthcare are likely to seek treatment at private hospitals, such as Mount Elizabeth Hospital and Gleneagles Hospital, to reduce the risk of catching the Wuhan coronavirus. This would result in improved profitability for private hospitals.

Expect positive outcome from extension of lease.

  • The initial lease term of 15 years for ParkwayLife REIT’s Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital ends in Aug 20. Master leasee Parkway Hospital Singapore (subsidiary of Parkway Pantai, the largest private healthcare operator in Singapore) has the option to extend the leases for another 15 years. Negotiation between ParkwayLife REIT and Parkway Hospital will commence shortly. Improved profitability for private healthcare operators provides a conducive environment for ParkwayLife REIT to negotiate for higher base rents. The lease structure with rental escalation of CPI + 1% would be maintained.


4Q19 RESULTS


Steady and resilient growth.

  • ParkwayLife REIT's 4Q19 revenue declined 1.9% y-o-y due to a one-off reclassification of insurance reimbursement received previously to property expenses. Excluding the reclassification, 4Q19 revenue would have grown 2.4% y-o-y, reflecting maiden contribution from three nursing rehabilitation facilities acquired on 13 Dec 19, higher rent from existing properties (minimum guarantee rent for Singapore hospitals increased by 1.6%) and appreciation of the Japanese yen. NPI grew 2.3% y-o-y. See Parkway Life REIT Announcements.

Interest expense increased 3.8% y-o-y.

  • Interest expense increased 3.8% y-o-y due to rising interest cost for the Singapore dollar debt and appreciation of the Japanese yen, partially offset by finance cost savings arising from the refinancing initiatives completed in 2018 and 1Q19.


STOCK IMPACT


Strong defensive qualities.

  • ParkwayLife REIT is resilient due to its long weighted average lease expiry (WALE) of 6.5 years. Its Japan assets (48 nursing homes and one pharmaceutical product distribution & manufacturing facility), which accounted for 38% of portfolio valuation, have long lease structure with WALE of 12.6 years.
  • Income visibility from resilient healthcare assets is highly valued, given current uncertain macro outlook.

Strong balance sheet.

  • ParkwayLife REIT further trimmed its cost of debts by 1bp q-o-q to 0.80%. Gearing remained stable at 37.1% (-0.1ppt q-o-q, +1.0ppt y-o-y). Interest coverage ratio was healthy at 14.1x (3Q19: 14.3x).
  • ParkwayLife REIT has ample debt headroom of S$95.5m before reaching 40% gearing and S$286.3m debt headroom before reaching 45% gearing.


EARNINGS REVISION/RISK

  • We maintain our earnings forecasts.


VALUATION/RECOMMENDATION



SHARE PRICE CATALYST

  • Yield-accretive acquisitions.
  • Renewal of lease for Singapore hospitals.





Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-01-29
SGX Stock Analyst Report BUY MAINTAIN BUY 3.780 UP 3.580



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