PLife – CIMB
Asset enhancements and CPI to boost DPU
• In line. 2Q09 distribution of S$11.4m (+14% yoy) and DPU of 1.89 cts (+14% yoy) were in line with Street and our expectations. YTD DPU of 3.77cts forms 50% of our full-year forecast. Net property income of S$15.0m (+28% yoy) was driven by full contributions from Japanese assets as well as higher rent from Singapore hospitals due to a high CPI + 1% (i.e. 6.25%).
• Singapore Hospitals’ minimum guaranteed rent to grow by 4.36%. Management announced that CPI for the next minimum guaranteed rent period (23 Aug 09-22 Aug 10) has been determined at 3.36%. This implies that under its unique lease structure, the minimum guaranteed rent from PLife’s Singapore hospitals is set to grow by 4.36%, based on its CPI + 1% lease structure.
• First asset-enhancement initiative; no borrowings required. The manager announced the completion of its maiden asset-enhancement work on its Japanese property, PLife Matsudo, at end-Jul 09. A total of S$2.56m had been spent to convert a utility room to a production area. The work was funded by cash on hand, with no impact on asset leverage. The enhancement should be highly accretive with a 17.4% return on investment. However, the incremental impact on DPU is not material at less than 1%. Nonetheless, this is a positive move to enhance the contribution of assets. We understand that this is the start of more enhancement work, which could include Singapore assets that contribute the lion’s share of revenue at 80%.
• Maintain Outperform; FY10-11 forecasts and target price raised. We raise our earnings estimates based on the announced CPI numbers, and include the accretion from asset enhancement. Separately, we increase our trust expense assumptions. Our DPU estimates rise by 2% for FY10-11. Our DDM-based target price rises correspondingly to S$1.31 from S$1.29 (discount rate 7.2%). We like PLife REIT for its visible earnings from its CPI + 1% formula and possibly upside from further asset-enhancement work. The acquisition of assets also looks probable in the near future with its low asset leverage of 23% and the availability of funding at undemanding costs. PLife offers an attractive and sustainable yield of 7% at 0.8x P/BV. Maintain Outperform.