PLife – DBS

Even more headroom now

Comment on Results

ParkwayLife REIT’s (PREIT) FY07 results were in line with our expectations. Gross revenues ended at S$16.9m as a result of higher variable rent component that is linked to the Adjusted Hospital’s Revenue. This was partially offset by higher property expenses as a result of more contributions to the management and sinking fund for Mount Elizabeth Hospital (MEH). DPU for FY07 was 2.27 Scts, annualized at 6.32 Scts.

There was a revaluation gain of S$56.3m on its investment properties, mainly contributed by MEH (+S$47.3m). This increased its NAV per unit to S$1.36, from S$1.25 as of listing.

Recommendation

PREIT also announced that it has received an investment grade rating of “BBB+” by Fitch Ratings. With the rating, it will allow PREIT to increase its aggregate leverage limit to a maximum of 60% of the value of its deposited property, from its previous capped gearing of 35%. While management indicated that a comfortable long-term gearing target is probably around 45%, the rating and revaluation gain allows PREIT to take up a maximum of about S$1.1bn of debt (at 60% gearing). Its current low gearing of 4% provides substantial flexibility to pursue its growth and acquisition strategy.

Management also indicated that any asset injection from its Sponsor would be done as a business case and evaluated on its investment and financial merits to the REIT.

Maintain BUY, TP: S$1.50. The prospects of the Group should remain firm on an aging population, increasing life expectancy, growing affluence, and Singapore’s drive to promote medical tourism. In addition, downsides are protected from gross revenues pegged to the higher of Adjusted Hospital’s revenue or [1+(1%+CPI)] on the total rent payable on the immediate preceding year. Maintain BUY, TP unchanged at S$1.50 based on DCF (WACC 5.6%, terminal growth 1%). Counter is currently trading at 11% discount to NAV and offers a forward yield of 5.4% (FY08F).