PLife – DBSV

Low beta play with growth

At a Glance

• 1Q10 DPU of 2.07 Scents (+9.4%) within our expectations

• NPI growth (+13.4%) driven by 8 nursing homes acquired in Nov’09 and higher rentals from Singapore hospitals

• Refinanced S$34m loan due 2H10 with S$50m 3-yr FRN

• Low beta play with room for growth; Buy, TP: S$1.51.

Comment on Results

1Q09 within expectations. PREIT’s 1Q10 DPU of 2.07 Scts (+9.5% yoy; 1% qoq) was within our expectations. Gross revenue grew by 14.1% to S$18.6m, largely from additional contribution from the 8 nursing homes in Japan acquired in 4Q09 (S$1.8m) as well as higher rental from Singapore hospitals, which had an upward rent revision by 4.36% (CPI+1% formula) in its Yr 3 of lease from Aug’09. NPI margin fell marginally to 92.3% arising from expenses related to the 8 new nursing homes. As a result, NPI grew by 13.4% to S$17.3m.

Issued S$50m FRN at 1.05%+6-mth SOR. PREIT has, on 23 Mar, issued S$50m FRN due 2013 at an interest cost of 1.05%+6-month SOR. Majority of the proceeds were used to repay its S$34m loan due in 2H10. Gearing stands at 28.2%, at an effective all-in borrowing cost of 3.06%.

Recommendation

A low beta play… We like PREIT’s defensive attributes with 89.8% of total portfolio having a downside revenue protection and 98.1% having rent review provision. General expectations that inflation could quicken along with the robust economic recovery bode well for PREIT’s Singapore hospitals arising from the CPI+1% formula.

…with room for growth through acquisitions. Buy, TP: S$1.51. PREIT has debt headroom of S$234.6m before reaching 40% gearing, which could be utilized for accretive acquisitions. We see Japan as a key possibility given its presence there. We adjusted our DCF-based TP slightly up to S$1.51 (WACC: 6.6%, t: 2%) as we fine-tuned our assumptions from its existing Japanese assets and lower interest costs. Our FY10F DPU of 8.3 Scts equating 6.3% yield, before any future acquisitions.