Maiden DPU delivery

RHT’s maiden DPU came in slightly above management’s forecast, thanks to higher operating hospital income and lower operating expenses. Yields remain compelling at 9%, offering total return of 18%, with downside mitigated by fixed base fees and FX hedges till Mar 14.

3QFY3/13 DPU (19 Oct-31 Dec) was broadly in line with consensus and our estimates, at 21% of our FY13 forecast. We tweak DPUs and DDM target price higher for a lower discount rate of 12.1% (prev. 12.4%) in-line with lower Indian bond yields. Maintain Outperform, with earnings delivery, execution and acquisitions being the catalysts.

Higher hospital income; lower expenses

RHTs 3QFY13 (19 Oct-31 Dec) DPU of 1.66 Scts was slightly above management’s DPU forecast of 1.63 Scts. The operational performance of its clinical establishments in 3Q was disrupted by the festive season in Oct and Nov, which affected variable fees pegged at 7.5% of revenue. But this was made up by lower operating expenses and higher hospital income from its two operating hospitals. Net of straight-lining, actual net operating income was 1% above forecast.

More upside in coming quarters

No operational stats were provided for 3Q though we note that its parent, Fortis saw 20% yoy growth in Indian hospital revenue (across assets within and outside RHT) on occupancy and ARPOB gains. The addition of beds at Gurgaon (soft-launched in Nov 12), Ludhiana and Chennai should contribute in the coming quarters.

Management, meanwhile, remains on the lookout for acquisitions, supported by debt headroom offered by its low gearing of 6.7%. With its parent in deleveraging mode, we believe that future acquisitions could increasingly be undertaken by RHT.

Maintain Outperform

Stability remains anchored by fixed base fees (>70% of fee revenues) while upside comes from revenue sharing through variable fees. Our Outperform call is supported by the 9% headline yields and the catalysts of earnings delivery, execution and acquisitions.

Good bargain at 10% yield

• Initiating coverage with BUY for 10% yield
  
• Exposure to fast growing Indian healthcare sector (15% CAGR), backed by Fortis
  
• 96% of assets are operational; distribution income hedged till FY14F, providing assurance in meeting DPU forecasts
  
• Confidence to build up as management delivers, particularly with announcement of maiden distribution end FY13
  

Buy for 10% yield and c.20% upside to S$0.97 TP. We initiate Religare Health Trust (RHT) with BUY, TP of S$0.97. This is an overlooked stock, which offers exposure to the fast growing Indian healthcare market, projected to be 15% CAGR (10-15F) by Frost & Sullivan. RHT, a business trust, has initial 17 assets (13 are operational), which we estimate should enable unitholders to enjoy distribution yields of c.10% at the current price.

Structured to offer upside potential. RHT derives its revenue from service fees payable by Fortis Healthcare, a leading integrated healthcare services provider in India, through base and variable fees. Variable fees are calculated at 7.5% of operating revenue, rather than profits. This provides upside potential as Fortis continues its growth trajectory on the back of increasing average revenue per bed, occupancy and bed capacities. Over the medium term, we 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 (at c.7%).

A good bargain, BUY for >30% upside. DDM-backed TP is S$0.97 (CoE: 11.8%, t=3%). The c.10% yield looks very attractive compared to peers trading at yields of 6.8%-8.4%. Currently, 96% of its assets are operational and its distribution income hedged in SGD till end FY14F, giving greater assurance in meeting our DPU forecasts. We see confidence rising as management delivers, with the first distribution (end FYE Mar’13) as a key catalyst. BUY for >30% total return upside. A key risk is the weakening of INR vs SGD; and, we estimate a 1% depreciation will impact DPU by c.1%, all else constant.

Indian healthcare exposure

Sponsored by Fortis Healthcare, the second largest hospital chain by revenue in India, RHT will be the first SGX-listed trust to offer unique exposure to the growing Indian healthcare market. We see long-term growth underpinned by capacity expansion and ARPOB increases.

We initiate coverage with Outperform and DDM-based target price of S$0.95 (discount rate: 12.4%). Forward yields of 9.7-10.0% (for ordinary unit-holders) are among the highest within the Singapore market and are attractive against listed peers. We expect catalysts from earnings delivery and execution.

Unique Indian healthcare exposure with Fortis

With 17 assets valued at INR32.6bn (S$748m), RHT will be the first SGX-listed business trust to offer exposure to the Indian healthcare market. Frost & Sullivan expects the Indian healthcare market to grow at a 15% CAGR by 2015, thanks to favourable demographics, rise in both insurance penetration and medical tourism, and a chronic shortage of beds. We expect RHT to tap into this growth, alongside sponsor Fortis, the second largest healthcare operator by revenue in India.

Long-term growth embedded in portfolio

Growth is embedded in RHT’s portfolio. With 1,782 operational beds as at end-Jun 12, its portfolio can ramp up by 79% without expansion and a further 44% when all stages of development are completed. Net revenue on selected RHT assets had grown by 10-36% in FY12. We expect growth to remain sustainable given supply gaps at certain states where RHT’s assets are located and rising beds, occupancy, and ARPOB as assets mature.

Downside protection; upside potential

RHT’s service fee revenues and terms are structured for stability and upside potential. Stability is anchored by its long 15+15 year terms for most assets, and a fixed base fee which would grow at 3.0% p.a. and underpin >70% of service fees revenue in FY13-14. Upside comes from the variable fees tied to 7.5% of underlying assets’ operating revenues.

Exposure to India's Healthcare Sector

Company Overview

Religare Health Trust, a business trust, comprising healthcare assets in India. Its mandate is to invest in medical and healthcare assets and services in Asia, Australasia and global emerging markets, including medical and healthcare asset developments.

• RHT's initial portfolio consists of 11 clinical establishments, four greenfield clinical establishments and two operating hospitals valued at S$748mn
• At the IPO price of S$0.90, RHT is trading at one time to its book value and appears inexpensive
• The institutional tranche was 2.5 times oversubscribed

What is the news?

RHT is scheduled to list on the third week of Oct-12. Approximately S$510.8mn will be raised from the public offering. 95% of the proceeds will be uitilised to partially fund the initial portfolio. Its initial portfolio consists of 11 clinical establishments (S$714mn), four greenfield clinical establishments (S$29mn) and two hospitals managed and operated by RHT (S$5mn), which are all geographically diversified across India.

How do we view this?

RHT provides unique value proposition for investors to have exposure to the growing demand of quality healthcare services in India and Asia Pacific. We like RHT's service fee revenues term structure that offers both downside protection (15 years term with annual escalation of 3%) and upside potential (7.5% of Fortis companies' operating revenue). In addition, rising affluence in upper middle class segment and underserved Indian healthcare market would benefit RHT. Foreign exchange risk is the main concern for RHT but forward contracts are put in place to hedge the currency translation up to FY2014.

Investment Actions?

On the valuation, RHT is priced at one time to book. The price of RHT appears inexpensive on the P/B basis relative to the rich P/B valuation of Ascendas India Trust (a-iTrust) at 1.27 times which is way above its historical P/B mean of 0.83. Annualised FY13 dividend yield of 9.0% including the distribution wavier (up to FY2014), looks appealing given the current slow growth and yield-starved period. By stripping out the distribution wavier, the yield is around 6.5% which is lower than a-iTrust yield of 7.1%. The institutional tranche was 2.5 times oversubscribed according to the news flow compared to Courts Asia which was 3.4 times subscribed.