PLife – DBS

Best hedge against inflation

Story: With surging inflation on the back of rising energy, fuel and food prices, ParkwayLife REIT (PREIT) looks to be the best hedge against inflation.

Point: In the latest review in May, MTI and MAS has raised the CPI forecast for 2008 to 5.0 – 6.0%, from 4.5% – 5.5% previously. DBS Economics Research expects inflation pressure to remain high in the near term. CPI is expected to peak at 8.1% yoy in Jun 08, with full year inflation at 6.4%, up slightly from previous forecast of 6.0%. We re-looked into our gross revenue assumptions for PREIT and raised CPI assumption for 2008 to 6.4% and 2009 to 2.8% (from our previous assumptions of 4% and 1.5%, respectively) pegging it in line with our economists’ forecasts. This means that PREIT’s gross revenue for its Singapore Hospitals should grow by at least 7.4% (=1% + 6.4%) in FY09. Consequently, our FY09F DPU forecast is
raised marginally to 7.17 Scts, from 6.99 Scts. Based on a last traded price of S$1.19, this translates into a net dividend yield of 5.7% and 6.0% for FY08F and FY09F respectively.

Relevance: PREIT still remains a Buy as it offers investors potential upside from higher hospital revenue. In this inflationary environment, investors can rest assured that growth is supported by 1%+CPI rate. Furthermore, PREIT has low net gearing and there is no major debt refinancing risk in the near future. Catalysts should come from further yield accretive acquisitions, in addition to the last three investments in Japan.

Maintain Buy, TP adjusted slightly to S$1.47 (from S$1.51 previously) to account for a higher risk-free rate of 3.9%, from 3.0% previously.