Stable growth continues

3Q DPU was largely in line at 26% of consensus and our full-year forecasts. 9MFY3/14 DPU formed 77% of our FY14 forecast. We factor in the updates on various project developments and a lower long-term exchange rate of Rs52:S$ (previously Rs51:S$), lowering FY14-16 DPUs by 1-4%. Stability of RHT’s rupee revenue is supported by its base service fee which we estimate to make up c.70% of FY14-15 revenue, but forex remains a key concern. We maintain our Add rating with a slightly reduced DDM-based target price of S$0.91. Potential catalysts include surprises in ARPOB and earnings delivery.

ARPOB grew qoq

Total revenue grew by 1.3% qoq due to higher hospital income. Operationally, the average ARPOB in rupee terms improved by 5.1% qoq despite a lower occupancy of 78% compared to 86% in 2QFY14. Mulund’s price increment and Kaylan’s Cardiology income and bypass surgeries contributed to the growth. We view this as a return to the norm as 2QFY14 occupancy and ARPOB were affected by increased common communicable diseases which require longer stays but generate lower income.

Update on project developments

Aside from the 3QFY14 results, RHT provided an update on the status of various projects within its portfolio. In 2013, the launch of Gurgaon and the completed expansion works at selected clinical establishments increased its installed bed capacity by 574 beds. The BG Road and Ludhiana projects are targeted to complete and commence operations in 2016, and expected to increase its installed bed capacity by 549. The Amritsar and Noida expansion works were put on hold and selected greenfield projects were delayed. The net impact on its FY14-16 DPU is expected to be c.-1%.

We maintain an Add rating

The anticipated Mohali acquisition was announced in the quarter, but we believe its net impact will be reduced by higher-than-expected funding costs. We expect RHT’s underlying assets to continue generating healthy ARPOB, and organic growth in FY15 as Gurgaon starts to contribute variable service fees and its first full-year base service fee. RHT’s FY14 dividend yield of c.10% remains high compared to S-REIT’s/BT’s simple average of 7.3%.

Proposed Mohali acquisition

RHT announced its proposed acquisition of The Mohali Clinical Establishment (Mohali) and interested person transaction to be entered into with Fortis Healthcare. We expect the acquisition to be yield accretive and come through in FY15. While we view the acquisition positively, we expect the higher funding cost to limit its positive impact. Our DDM-based target price increases by 1%and FY15 DPU by 1.3% as we factor in the potential acquisition. We maintain our Add rating.

What Happened

RHT announced its proposed acquisition of Mohali in Punjab, which isoperated by Fortis Healthcare and owned by Radha Soami Satsang Beas, a non-profit philosophical organisation. The total costs to be incurred are estimated at S$68.8m, of which S$65m will be funded by debt and the remainder by cash. RHT proposes to enter into a Hospital and Medical Services Agreement (HMSA) with Fortis Healthcare, similar to RHT’s existing HMSAs, with base fee with 3% annual increment and variable fee at 7.5% of the operating income. There will be a non-recurring base fee of S$0.7m for the first year and S$0.5m for the second as the oncology block ramps up.

What We Think

Yield accretive. We view this deal positively as it is yield accretive and there is growth potential from the new 55-bed oncology block in Mohali, which is expected to be functional in 2HFY14. We estimate the initial net fee yield to be7.3% and an impact on FY15 DPU of 1.3%, limited by the higher funding cost of 5.8%.

Balance sheet to remain healthy. Gearing is expected to increase to 13.3% post the acquisition. Factoring in potential capital expenditures, RHT’s FY14 and FY15 asset leverage of 11-20% remains one of the lowest among S-REITs/business trusts. There is also ample debt headroom of about S$374.7m assuming gearing limit of 40%.

What You Should Do

The yield-accretive acquisition is a positive and RHT continues to offer stability through its base fee (70% of FY14 revenue) and growth through the variable fee and hospital income. Its FY14 and FY15 dividend yield of about 10.7% on average remains one of the highest among S-REITs/business trusts. We maintain our Add rating.

Look out for maiden distribution

• Expect maiden distribution of 8% annualised payout in FY13 results announcement on 21 May
  
• Share price appreciation panning out as expected; still has 8.3% yield and upside to revised TP
  
• Recent drop in Indian bond yields and stable INR positive for RHT
  
• Maintain BUY, TP raised to S$1.06
  

Expect DPU of 3.56 Scts for FYE Mar13. RHT will be reporting its FYE Mar13 results on 21 May. We are expecting a distribution per unit (DPU) of 3.56 Scts, equating to an annualised yield of 8% (since 19 Oct, 2012) at the current price of S$0.985. RHT pays out its distribution half yearly. In its 3Q results released earlier in Feb, RHT reported a distributable income of S$9.4m, translating into a DPU of 1.66 Scts for the period from 19 Oct to 31 Dec, 2012. This was marginally above the projected 1.63 Scts disclosed in its IPO prospectus.

Still provides 8.3% yield. In our initiation report on 28 Nov, 2012 (“Good bargain at 10% yield”), we had indicated that there will be rising confidence on RHT as it approaches May 2013 with the first distribution announced. So far, RHT has appreciated by c.25% panning out as per our expectations. Despite this, RHT still provides an attractive 8.3% yield for FY14F; and, does not include the 3.56 Scts we expect for FY13F.

Conditions working in RHT’s favour. Currently, conditions seemed favourable for RHT: (i) Indian bond government bond yields have fallen to 7.4%, from 8.3%, arising from RBI rate cuts and lower WPI; (ii) cross rate of SGD/INR has remained relatively stable at c.INR44/SGD. This possibly provides an opportune time for RHT to further hedge its distribution beyond FYE Mar 14, providing assurance to unit holders.

Maintain BUY, TP raised to S$1.06. We raised our DDM-based TP to S$1.06 (from S$0.97 previously) as we roll our valuations over to FY14F (from FY13F) and a lower cost of equity at 11.6% (from 11.8% previously, due to a lower risk-free rate). At our TP, the implied yield is 7.8%, a 200 bp spread over the Indian Government 10-year bond yield (post tax) and about 170 bp to 400 bp over selected peers.

Ramping up at Gurgaon

Key positives include healthy occupancy and average revenue per bed, faster ramp-up at Gurgaon Hospital and capacity expansion plans. We expect growth from base fee step-ups, variable fee upside alongside higher underlying assets’ ARPOB and occupancy and acquisitions.

4QFY13 DPU broadly met street and our expectations, forming 24% of our FY13 forecast. We finetune DPUs incorporating 4Q, introduce FY16 numbers and raise our DDM-based target price on a lower discount rate of 11.7% (prev. 12.1%), in line with falling Indian bond yields. Maintain Outperform with catalysts from earnings delivery and acquisitions.

Faster ramp-up at Gurgaon

We expect stability to be anchored by fixed base fees, which make up ~70% of revenues, ex. straight-lining and upside from revenue-sharing via variable fees. RHT’s 4Q DPU came in marginally below forecast on higher opex from a quicker ramp-up at Gurgaon Hospital. This should however be mitigated by adjustment in base fees from FY14. Since its inauguration in May 13, Gurgaon’s operational beds have hit management’s targeted 450 for phase 1. Portfolio operating metrics remain healthy at 73% occupancy (after incorporating bed additions) vs. 3Q’s 75% while average revenue per operating bed (ARPOB) turned a stronger Rs. 0.9 Cr. vs Rs. 0.85 Cr. last quarter. RHT also announced that CEO and chairman Ravi Mehrotra will relinquish his CEO post to separate the roles of chairman and CEO. He will be succeeded by current COO, Gurpreet Dhillon.

Keeping an eye on growth

Management has announced four capacity expansion projects (totalling Rs. 246m or S$6m) to add c. 200 beds over 2013. Backed by its low asset leverage of ~7%, it is evaluating acquisitions for growth and is going through due diligence for some.

Maintain Outperform

Our Outperform call is supported by attractive headline yields and the catalysts of earnings delivery, execution and acquisitions. Yields of 8.3% remain among the highest within REITs/business trusts under coverage and could benefit
from the sustained search for yields.

A positive start

• DPU of 1.66 Scts vs forecast of 1.63 Scts; distributions are paid semi-annually with first payment expected in May 2013
  
• Net property income margins tracking above forecast
  
• Despite rising 14% since our initiation on 28 Nov 12, RHT still offers c.9% yield
  
• Maintain BUY, S$0.97 TP for c.16% total return
  

Highlights

DPU of 1.66 Scts, marginally higher than IPO forecasts. RHT reported a distributable income of S$9.4m. This translates into a DPU of 1.66 Scts for the period from 19 Oct 12 to 31 Dec 12, which is marginally above the projected DPU of 1.63 Scts disclosed in its IPO Prospectus. This was achieved on the back of higher hospital income and lower expenses as a result of tighter cost management. Distributions will be paid semi-annually, hence the first distribution will be made sometime in May 13, post its FY13 results announcement.

Net property income margins tracking above forecast. Margins came in at 57.5%, c.1ppt above the forecast. This was due to lower operating expenses from a lower variable fee and tighter cost control. The variable fee recorded was S$4.12m, about 5% lower compared to its IPO forecast of S$4.3m. This was mainly due to lower operating income recorded by Fortis during the festive period in Oct and Nov.

Our View

Yield still attractive at c.9% despite share price rise. Despite share price appreciating by c.14% since our initiation on 28 Nov12, RHT still offers attractive yields of 8.8%/ 9.1% for FY13F (annualized)/ FY14F. Over the medium term, we continue to believe DPU could be further enhanced as its greenfield clinical establishments come onstream, coupled with inorganic growth through acquisitions to leverage on its current low gearing (c.7%).

Recommendation

Maintain BUY, TP: S$0.97. We maintain our DDM-backed TP at S$0.97 (cost of equity: 11.8%; t=3%). Coupled with a prospective yield of c.9%, RHT still offers a total return of c.16%.