Stable growth continues
3Q DPU was largely in line at 26% of consensus and our full-year forecasts. 9MFY3/14 DPU formed 77% of our FY14 forecast. We factor in the updates on various project developments and a lower long-term exchange rate of Rs52:S$ (previously Rs51:S$), lowering FY14-16 DPUs by 1-4%. Stability of RHT’s rupee revenue is supported by its base service fee which we estimate to make up c.70% of FY14-15 revenue, but forex remains a key concern. We maintain our Add rating with a slightly reduced DDM-based target price of S$0.91. Potential catalysts include surprises in ARPOB and earnings delivery.
ARPOB grew qoq
Total revenue grew by 1.3% qoq due to higher hospital income. Operationally, the average ARPOB in rupee terms improved by 5.1% qoq despite a lower occupancy of 78% compared to 86% in 2QFY14. Mulund’s price increment and Kaylan’s Cardiology income and bypass surgeries contributed to the growth. We view this as a return to the norm as 2QFY14 occupancy and ARPOB were affected by increased common communicable diseases which require longer stays but generate lower income.
Update on project developments
Aside from the 3QFY14 results, RHT provided an update on the status of various projects within its portfolio. In 2013, the launch of Gurgaon and the completed expansion works at selected clinical establishments increased its installed bed capacity by 574 beds. The BG Road and Ludhiana projects are targeted to complete and commence operations in 2016, and expected to increase its installed bed capacity by 549. The Amritsar and Noida expansion works were put on hold and selected greenfield projects were delayed. The net impact on its FY14-16 DPU is expected to be c.-1%.
We maintain an Add rating
The anticipated Mohali acquisition was announced in the quarter, but we believe its net impact will be reduced by higher-than-expected funding costs. We expect RHT’s underlying assets to continue generating healthy ARPOB, and organic growth in FY15 as Gurgaon starts to contribute variable service fees and its first full-year base service fee. RHT’s FY14 dividend yield of c.10% remains high compared to S-REIT’s/BT’s simple average of 7.3%.
Proposed Mohali acquisition
RHT announced its proposed acquisition of The Mohali Clinical Establishment (Mohali) and interested person transaction to be entered into with Fortis Healthcare. We expect the acquisition to be yield accretive and come through in FY15. While we view the acquisition positively, we expect the higher funding cost to limit its positive impact. Our DDM-based target price increases by 1%and FY15 DPU by 1.3% as we factor in the potential acquisition. We maintain our Add rating.
RHT announced its proposed acquisition of Mohali in Punjab, which isoperated by Fortis Healthcare and owned by Radha Soami Satsang Beas, a non-profit philosophical organisation. The total costs to be incurred are estimated at S$68.8m, of which S$65m will be funded by debt and the remainder by cash. RHT proposes to enter into a Hospital and Medical Services Agreement (HMSA) with Fortis Healthcare, similar to RHT’s existing HMSAs, with base fee with 3% annual increment and variable fee at 7.5% of the operating income. There will be a non-recurring base fee of S$0.7m for the first year and S$0.5m for the second as the oncology block ramps up.
What We Think
Yield accretive. We view this deal positively as it is yield accretive and there is growth potential from the new 55-bed oncology block in Mohali, which is expected to be functional in 2HFY14. We estimate the initial net fee yield to be7.3% and an impact on FY15 DPU of 1.3%, limited by the higher funding cost of 5.8%.
Balance sheet to remain healthy. Gearing is expected to increase to 13.3% post the acquisition. Factoring in potential capital expenditures, RHT’s FY14 and FY15 asset leverage of 11-20% remains one of the lowest among S-REITs/business trusts. There is also ample debt headroom of about S$374.7m assuming gearing limit of 40%.
What You Should Do
The yield-accretive acquisition is a positive and RHT continues to offer stability through its base fee (70% of FY14 revenue) and growth through the variable fee and hospital income. Its FY14 and FY15 dividend yield of about 10.7% on average remains one of the highest among S-REITs/business trusts. We maintain our Add rating.