PLife – DBS

Poised to acquire

• Keen interests seen from investors during our conference in New York
• Clear strategies and downside rental protection are key positive attributes, in our view
• Expect acquisitions in near term, capitalizing on debt headroom and low interest rates
• Reiterate Buy, TP: S$1.37 equating to 26% total return upside

Downside rental protection key attribute. We hosted PREIT at our conference in New York earlier this month to good reception with US based fund managers/investors. The downside rental protection and clear strategies presented by management caught on well with investors. Based on the CPI+1% formula, minimum rental for its Singapore Hospitals are set to grow by 4.36% to at least S$52.7m in its third year of lease (23 Aug ‘09 – 22Aug ‘10).

Acquisitions very likely in near term. We expect management to deliver on acquisitions (funded by debt) in the near term for further growth, possibly scale up in Japan, capitalizing on the yield differential between NPI yield and  cost of funds, and the aging population. Management has already put in place a diversified source of funding (S$500 MTN facility, S$126m untapped bank facilities and S$50m 3-year revolving Murabaha facility).

Expect to trade towards NAV, Buy (TP: S$1.37). We like PREIT for its defensive features, and its opportunity for growth via acquisitions coupled with strong fundamentals – high interest cover of 6.9x, fixed 100% interest rate for debt and high gearing headroom (up to S$963m). We think PREIT could trade up towards NAV of S$1.34 as the REIT sector further re-rates. Revised DCF TP up to S$1.37 (WACC 6.6%) as we adjust our terminal growth rate to 2%, based on an assumed CPI rate of 1% over the long term – still below the average 10 year historical CPI rate (1.4%).