PLife – UOBKH
Defensive and resilient
Enhancing contributions from Singapore Hospitals. Parkway Life REIT has embarked on asset enhancement initiatives to improve the returns from low revenue yielding space. Space previously occupied by management and support functions has been decanted to create centres of excellence. Renovation works are ongoing to set up Parkway Cancer Centre at Mount Elizabeth Hospital, Parkway Heart Centre and Obstetrics & Gynaecology wards at Gleneagles Hospital and Women Centre at East Shore Hospital. The enhancement allows the hospitals to hire more specialist consultants, thus increasing patient admission and variable rent. Parkway Life REIT does not have to bear cost incurred for refurbishment, as the lessee, Parkway Holdings, is responsible for capex till Dec 09.
Protection against slowdown. CPI was 2.1% in 2007. The minimum rent payable from Singapore hospitals this year would be 3.1% (CPI + 1%) higher than levels in 2007. The downside protection kicks in on 23 Aug 08, a year after listing. Parkway Life REIT is protected against fluctuation in admission of international patients due to slower growth in regional countries. Revenue contribution from Mount Elizabeth, Gleneagles and East Shore hospitals increased by only a marginal 0.8% qoq to S$12m in 2QFY08. This comprises a base rent of S$7.5m and a variable rent of S$4.5m.
Diversification from acquisitions in Japan. Parkway Life REIT has acquired a pharmaceutical production and distribution facility in Matsudo City, Chiba prefecture and two nursing homes located in Yokohama City and Ibaraki City for S$69.4m. In particular, rental income from the two nursing homes is index-linked to inflation with rent reviews every five years. These acquisitions allow Parkway Life REIT to gain exposure to Japan where the population is ageing rapidly. Revenue contribution from the Japan properties was S$0.5m in 2Q08 (1.5- month contribution from Matsuda facility, 1-month contribution from nursing homes). The Japan properties will provide full-quarter contribution in 3Q08.
Low gearing provides significant room for acquisitions. Parkway Life REIT will partner sponsor Parkway Holdings to expand in the region with Parkway Life REIT acquiring third-party hospital buildings and Parkway Holdings taking over as operator. The company’s gearing is low at only 10%. There is headroom of S$570m for growth via acquisitions if it utilises debt capacity for optimal debt level of 45%. Parkway Life REIT targets to double the size of its portfolio to S$1.6b by end-09. It also plans to diversify into medical offices, research & development (R&D) facilities and warehouse and manufacturing facilities for biomedical and pharmaceutical industries.
Reiterate BUY. We like Parkway Life REIT for its healthcare focus. It provides strong defensive qualities as rental income from hospitals in Singapore and nursing homes in Japan is linked to inflation. Our target price is S$1.54 based on the discounted dividend model (required rate of return: 7.6%; terminal growth: 2.8%). The stock is trading at a 12.7% discount to NAV/share of S$1.34. Parkway Life REIT declared DPU of 1.66 cents, which will be paid on 27 Aug 08.