Price (07 Nov 13) S$2.40
Target price S$2.30
Steady 3Q as SG Hospitals Benefit from 4.4% Rental Uplift
Citi's Take — 3Q13 DPU of 2.66 cents (2Q: 2.63 cents) was largely in-line with expectation, rising 1%qoq on the upward rent revision from its Singapore hospitals (+4.4%, commencing 23 Aug), as well as incremental contribution from the acquisition of two nursing homes in Jul-13. We expect further sequential improvement in 4Q13 on the full-quarter impact on the rent revision from the Singapore hospitals, as well as maiden contribution from the recent acquisition of five more nursing homes in Japan (completed end Sep-13).
Financial Highlights — Group NPI rose by 3.4%qoq to S$21.8m, as NPI from the Singapore hospitals rose by 2.1%qoq to S$14.5m, following a 4.44% upward rent adjustment (per CPI +1 % formula) which commenced 23 Aug 2013. At the same time, NPI from its Japan portfolio rose by 6%qoq to S$7.2m following the acquisition of two nursing homes (c.S$23m) as well as a slight appreciation of the yen during the quarter. On the other hand, the sequential NPI improvement was partially offset by higher financing costs (+9.5%qoq) and mgmt fees, as well as lower FX hedging gains (3Q: S$0.34m. 2Q: S$0.42m).
Capital Management – P-Life has successfully termed out the debt (S$145m) due in 2014 to 2017/8, resulting in a longer weighted average debt maturity of 3.1 years (Jun-13: 2.1 years). Notwithstanding the lengthening of the debt profile, all-in borrowing cost remained relatively low at 1.54% (Jun-13: 1.52%). As a result of the recent acquisitions in Japan, which were fully debt-funded, gearing has also risen to 35.2% (Jun-13: 31.2%).
Changes to estimates and TP - Post results, we update our earnings estimates to factor in the recent acquisition of the five nursing homes in Japan (completed end Sep-2013) and lower financing costs, though this is partially offset by lower than expected hedging gains. We raise FY13E-15E earnings by ~9-14%. As a result of the changes, we also raise our DDM-derived TP to S$2.30 (from S$2.22).
We derive our S$2.30 target price for PLife REIT using DDM. We have made the following assumptions in our DDM valuation, which are largely in line with those used for S-REITs in our coverage: 1) A risk-free rate of 3.1% based on the average of 10-yr SGS bond yield from 2003 to 2008, a period of normalizing US growth and tightening monetary policy, and cost of equity of 6.7%; 2) Terminal growth of 1%; 3) Zero earnings from Mt Elizabeth beyond 2074 and Gleneagles, Eastshore beyond 2082 when land leases expire; and 4) Potential acquisitions are excluded.
The key downside risks to our investment thesis and target price on PLife REIT include: 1) Loss of master lessee as the properties are specialized medical facilities and have limited uses; 2) The growth of lower-cost medical expertise and facilities in the region might draw medical tourists away from Singapore; 3) Competition from more medical centers and new entrants in Singapore; and 4) Changes in government healthcare regulations. Upside risks include: 1) Higher-than-expected inflation levels which lead to higher revenue for the Singapore hospitals; 2) Stronger than expected rental reversions at its Japan nursing homes; and 3) The acquisition of more assets at yield-accretive levels
Publish date: 08/11/13