PLife – CIMB

More reasonable valuations

PREIT has de-rated 5% to more reasonable valuations since our downgrade. Fundamentally, it remains one of the most stable REITs with long leases, downside protection and CPI-linked rental reviews. There is further room for acquisitions given a healthy balance sheet at 35% gearing and debt headroom of S$131m-287m at 40%-45% gearing. We maintain our DDM-based target price (discount rate: 7%) and upgrade PREIT on valuation grounds. We have yet to factor in any acquisitions but estimate that a S$100m acquisition at NPI yield of 7% could lift our target price by 5% to S$2.53. Re-rating catalyst will be yield-accretive acquisitions.

What Happened

PREIT has de-rated 5% since our downgrade on 2 May 14, which was largely premised on expensive valuations.

What We Think

Fundamentally attractive. Aside from being in a resilient industry, PREIT benefits from favourable lease structures such as a long-lease term to expiry (>10 years), downside protection for 91% of its revenue and CPI-linked rental review for 67% of its portfolio. The Singapore hospitals alone should drive organic growth of 2.7% over the next two years assuming a CPI of 3%.

Further room for acquisitions. PREIT’s exposure in Japan (>30%) positions it as a proxy for Japanese reflation. More importantly, its early entry and good working relationship with Japanese nursing home operators allow PREIT to consistently make yield-accretive acquisitions despite rising competition. We expect more acquisitions given its healthy gearing of 35% and debt headroom of S$131m-287m. Aside from Japan, Australia and Malaysia are potential markets.

More reasonable valuations. The yield spread for PREIT against 10-year government bond yields has widened from 175bps (during our downgrade) to 275bps. While this remains below the S-REITs simple average of 3.8%, we believe this is a more reasonable level given PREIT’s stability.

What You Should Do

Hold for a stable REIT with c.5% dividend yield. We have only factored in organic growth, but estimate that a S$100m acquisition at NPI yield of 7% could raise our target price by 5% to S$2.53.