PLife – DBSV

Stable as it is

At a Glance

• 2Q10 DPU of 2.09 Scents (+10.9%) within our expectations; NPI growth driven by 8 nursing homes acquired in Nov’09

• Potential for interest savings (current : 2.6%) as it explores refinancing for JPY facility of S$207m (due in 2H11) in 3Q10

• Buy, TP: S$1.59, for its 6% yield, stable, defensive structure with 88% rental downside protection

Comment on Results

2Q10 DPU 2.09Scts, within expectations. 2Q10 DPU of 2.09 Scts (+10.9% yoy; 1% qoq) was within our expectations. Gross revenue grew to S$18.7m (+16.4% yoy), driven largely by additional contribution (S$1.8m) from the 8 nursing homes in Japan acquired in Nov’09, higher rental from existing properties, and partial contribution from 6 nursing homes acquired in Jun’10. NPI margin fell marginally to 92.4% arising from expenses related to the 8 new nursing homes. As a result, NPI grew by 15.6% to S$17.3m.

Minimum rent for Singapore Hospital to grow by 1.73%. Rental for its Singapore hospital is set to grow by at least 1.73% in its 4th year of lease (Aug’10 – Aug’11) over the actual rental in the 3rd year of lease, based on (CPI+1%) formula.

All-in effective borrowing costs at 2.6%, with a weighted average term to maturity of 2.87 years. PREIT is exploring and targeting to complete the refinancing of a JPY facility of c.S$207m (due in 2H11) in 3Q10, to further lengthen debt weighted average term to maturity. With the tightening of credit spreads, this could present potential interest savings.

Recommendation

Resolution of tussle at Parkway offers Life a clearer path. With the emergence of a clear “winner” for majority control for Parkway, we believe this bodes well for PREIT. Having Khazanah as the major shareholder also provides for the possible injection of Pantai hospitals in Malaysia, in our view, though this could take place over the medium term.

A defensive play, with opportunistic growth. We like PREIT for its stable, defensive portfolio with 88% of portfolio revenue with downside rental protection and 98.4% with rent review provision. Gearing stands at 34%; PREIT has an additional debt headroom of c.S$121.5m before reaching 40% for acquisitions, though we believe there could be some form of equity raising should there be a potentially larger deal, given our view that management will likely not overstretch its balance sheet. Maintain Buy, TP S$1.59 based on DCF (WACC 6.6%, t=2%)