The dust has settled…what next?

We caught up with management post the listing of IHH. Discussions revealed that management has grown more positive and is gearing up for acquisitions, particularly in Malaysia. A new asset-recycling initiative in Japan strengthens long-term organic growth.

We defer the bulk of balance acquisition projections to 2013, lowering FY12-13 DPU estimates, but peg 2% growth to its Japan portfolio. DDM target price rises on lower 7% disc. rate (7.4% previously) as we align risk premium to peers. The stock now trades at 5% yield and 30% premium over book; downgrade from Outperform to Neutral.

First entry into Malaysia

Having raised Australia and Malaysia as potential markets, management took its maiden step into Malaysia through a small S$6.45m acquisition, completed Aug 2012. We expect further acquisitions of Malaysian hospitals (priced at bite-size amounts of S$10m-30m each, from 3rd party or IHH) and believe total c.S$200m of acquisitions will provide DPU uplift of c.4%. Despite almost S$250m headroom to 45% gearing, we note flexibility for mixed funding as the gap between debt and equity funding has narrowed.

Portfolio still going strong

Outside of acquisitions, we estimate 2-4% minimum DPU growth on CPI-pegged leases of Singapore hospitals (60% of rev) alone. In Japan, management unveiled AEI collaboration with operator, paving the way for further enhancements and a new asset-recycling initiative. We view the latter as a compelling strategy for long-term growth as PLife monetises mature and non-core assets, which are replaced by pipeline assets with more growth potential.

On a portfolio basis, medium- to long-term plans include an increase in exposure to revenue-sharing arrangements to capitalise on strong growth in healthcare markets. With a significant proportion of portfolio on CPI-pegged leases, the shift mitigates future normalisation of CPI rates.

Premium valuations

We like PLife for its defensiveness and remain confident of accretive acquisitions. We see PLife as a good yield-play complement to IHH’s growth story. That said, the market has rewarded the stock with a handsome defensive premium, in our view. At 30% premium over book and yield compression to 5%, we struggle to see significant upside. Earlier-than-expected acquisitions will be a re-rating catalyst.

• We are downgrading PLife to HOLD following the expiry of the right of first refusal granted by Parkway Holdings, which is today part of IHH Healthcare.
  
• The expiry suggests:
  

  a. Mt Elizabeth Novena may not be sold to PLife;
  

  b. hope for dual listing of Plife in Malaysia may not materialize.
  

• PLife’s 5% yield, which still has upside given Singapore’s high inflation, is expected however to provide cushion.
  

Stable growth

PREIT achieved 2Q12 DPU of 2.5 S¢ (+4.6% YoY), ~24% of our FY12 estimates, which was in line with our expectations. NPI was up 9.3% YoY to S$21.4m, due to full-quarter contribution from acquisitions made during 1Q12 and higher rental income from Singapore properties. With growing demand for quality healthcare services and facilities amid the economic uncertainty, management is taking a cautious stance towards acquisitions that are in the pipeline. In the meantime, PREIT will continue to explore accretive AEI opportunities to boost growth. At S$1.995, PREIT is trading at 5.1% FY12F yield (it traded at 5.3% during its heydays in 08/09). We have tweaked our COE assumptions in our DDM valuation methodology, given the ongoing uncertainties. Our revised TP is S$2.11 (up from S$2.07). We remain positive on PREIT's long-term prospects and we think PREIT could make some acquisitions in 2H12.

Looking to expand portfolio in Australia and Malaysia. PREIT is negotiating to acquire healthcare assets in Australia and Malaysia where the demand for quality healthcare services in these two markets continue to be strong. As at end 2Q12, PREIT has a gearing of 36.4%, with debt headroom of S$228.7m before reaching 45% gearing. It is in a good position to take on suitable acquisitions.

New Refurbishment AEI concept helps growth. PREIT introduced its new Refurbishment AEI concept, where the cost of refurbishment AEI is borne by PREIT in return for incremental rent. The first Refurbishment AEI at a Japan nursing home is expected to yield a 2% increase in gross rent from this property. PREIT will continue to look out for AEI opportunities to drive growth.

Yield is decent for a defensive stock. We like PREIT for its defensive nature, especially during these uncertain times. The stock's yield may be lower vis-à-vis other S-REITs, but it has a unique revenue downside protection structure.

Company Overview

PLife REIT is one of the largest listed healthcare REITs in Asia by asset size. Its mandate is to invest in income-producing real estate and/or healthcare-related assets primarily used for healthcare and/or healthcare-related purposes in Singapore and Asia.

• 2Q12 revenue $23.4mn, NPI $21.4mn, distributable income $15.0mn
• DPU for 2Q12 at 2.48 cents
• Raise FY12-16 DPU by 1.1%
• Downgrade to Neutral on valuation ground despite higher target price of $2.010

What is the news?

PLife REIT reported another set of steady results, with DPU grew 4.6% y-y to 2.48 cents. The growth boiled down to the full quarter revenue contribution from the three Japan properties acquired in March 2012 and higher rent received from Singapore properties. The acquisition of strata titled units/lots within Gleneagles Medical Centre Kuala Lumpur (GMCKL), Malaysia was completed on 1 August 2012.

How do we view this?

2Q12 DPU was in-line with our expectation. The DPU for the first two quarters translated to 51% of our FY12 estimates. Revenue contribution from GMCKL will kick in from the forthcoming quarter.

Investment Actions?

Lower all-in interest cost, higher-than-expected annual rental revision for Singapore properties and AEI at Ishizugawa nursing home raised our DPU estimates by 1.1% on average for the next five years and our price target to $2.010. Despite the fundamentals are intact with sustainable and growing DPU, the stock price is nonetheless fairly valued on valuation ground. Dividend yield of 4.9% may not be sufficient to warrant an accumulate call and thus we downgrade our recommendation to neutral.

Maintains resilience during challenging times

PREIT achieved 1Q12 DPU of 2.6 S¢ (+8.3%), representing ~26% of our FY12 estimates. NPI was up 5.6% YoY, which was mainly attributed to full-quarter contribution from acquisitions made during 1Q11 and higher rental income from Singapore properties. Lower finance cost, a result of lower rates locked in during refinancing, enabled PREIT to achieve the higher growth in 1Q12 DPU. It recently marked its foray into the Malaysian market, with the acquisition of strata-titled units at the Gleneagles Medical Centre in KL. Going forward, management remains cautiously optimistic with regard to near-term acquisitions, although the longer-term is still positive, backed by growing demand for quality healthcare services and facilities. PREIT is currently trading at 5.3% yield. Maintain BUY with DDM-based TP of S$2.07.

Additional contributions from new acquisitions. PREIT acquired three nursing homes in Japan in end 1Q12. These nursing homes would start making full-quarter contributions to earnings from 2Q onwards, while its Malaysia properties would start contributing from 3Q. PREIT is negotiating to acquire heathcare assets in Australia and/or Malaysia where the demand for quality healthcare services in these two markets remain strong.

Expect higher rental from Singapore properties. Between Jul 11 and Dec 11, the average CPI was 5.5%. From Jan 12 to Mar 12, CPI on average was ~5%. Should the CPI for Apr 12 – Jun 12 be 0%, rental at its Singapore properties can be expected to be ~5% higher (based on CPI+1% formula) for the new lease term (beginning Aug 12). This would contribute to revenue growth.

We like PREIT for its defensive nature. We derive a TP of S$2.07, based on DDM methodology. We also like PREIT for its unique revenue downside protection structure. Maintain BUY.