Potential Catalyst In The Making
Sponsor IHH Healthcare has to consider recycling assets if it decides to acquire
Ramsay Sime Darby for RM5.67b (S$1.83b). We estimate that the potential acquisition
of Mount Elizabeth Novena Hospital from IHH for S$1,286m could increase PREIT’s
2023F DPU by 17% to 17.6 S cents and raise our target price from S$4.82 to S$5.42.
Management might consider pursuing the acquisition over two phases to make the
sizeable deal more digestible. Maintain HOLD. Target price: S$4.82.
WHAT’S NEW
• Scaling up in home base Singapore. As part of the strategic collaboration between the two
companies, sponsor IHH Healthcare has granted Parkway Life REIT (PREIT) the first right of
refusal (ROFR) to acquire the hospital block of Mount Elizabeth Novena Hospital for a period
of 10 years. Mount Elizabeth Novena Hospital commenced operations in 2012. It has 13
operating theatres, 38 medical suites (excluding 216 sold to private medical specialists for
RM1,210m (S$495m) in 2012) and 333 single-bed-only wards. The property is currently
valued at RM3,961m (S$m1,278m) on IHH’s balance sheet.
• Sponsor IHH Healthcare on acquisition trial. Sponsor IHH Healthcare has submitted a bid
to acquire Ramsay Sime Darby for RM5.67b (S$1.83b) on a cash-free debt-free basis.
Ramsay Sime Darby is a 50:50 JV between Ramsay and Sime Darby and operates six
hospitals in Malaysia. The acquisition is conditional upon the completion of satisfactory due
diligence. IHH would need funding should it decide to proceed to acquire Ramsay Sime
Darby, which could be fulfilled by asset recycling through divestment of the hospital block of
Mount Elizabeth Novena Hospital to PREIT.
• AEI for three Singapore hospitals. The asset enhancement initiative (AEI) for the three
Singapore hospitals is tracking schedule. We expect the initiative to focus on Mount
Elizabeth Hospital located near Orchard Road, which is the largest and oldest of the three
hospitals. The upgrading will focus on improving productivity and efficiency, including
rejigging of hospital layout and right-sizing of operating theatres and wards. PREIT will
benefit from enhancement to revenue generation as rental escalation is pegged to CPI + 1%
or 3.8% of adjusted hospital revenue, whichever is higher.
• Benefitting from built-in rental escalation. Rental escalation for the three Singapore
hospitals is fixed at 3% per year for 2022, 2023 and 2024. Thereafter, rental escalation is
pegged to CPI + 1% formula or 3.8% of adjusted hospital revenue, whichever is higher. CPI
is deemed to be 0% if it is negative. Thus, growth in rental for the three hospitals in
Singapore is always positive and at least 1% per year.
• Continue to increase scale of nursing homes in Japan. PREIT has completed the
acquisition of a nursing home located in the Greater Tokyo region in Japan for ¥3,200m
(S$37.9m) on 17 Dec 21. The acquisition is priced at 7% below valuation and is expected to
generate NPI yield of 5.9%. This was the third acquisition in 2021 and brings PREIT’s Japan
portfolio to 52 properties valued at S$804m (35.4% of AUM). The nursing home is operated
by Habitation Group, PREIT’s largest nursing home operator in Japan. The acquisition
comes with a 20-year lease agreement, which lengthens PREIT’s WALE by gross revenue
from 17.42 to 17.47 years.
• Conservative capital management. PREIT has maintained a healthy aggregate leverage at
35.4% as of Dec 21. It has term out with a five-year committed loan facility of up to ¥7.7b
secured in Dec 21. There is no debt refinancing till Jun 23. Its weighted average debt maturity
has improved to 3.9 years. Cost of debt remains low at 0.52%, while interest coverage ratio is
an impressive 21.5x.
• Appreciation of capital values supported by lease extension in Singapore. PREIT
recognised revaluation gains of S$239.1m in 2021 (increase in portfolio value of 11.7%). NAV
per share has increased 20.9% yoy to S$2.37.
STOCK IMPACT
• Refocusing on home base Singapore. Our effort to value Mount Elizabeth Novena Hospital
is hampered by the lack of disclosure on financial performance of Mount Elizabeth Novena
Hospital, including its revenue and EBITDA, as a separate hospital. In our analysis, we have
assumed that:
a) The four hospitals in Singapore, Mount Elizabeth, Gleneagles, Parkway East and Mount
Elizabeth Novena, generated revenue of S$1,038m in 2019, which is a normalised year
before the impact of the COVID-19 pandemic.
b) The four hospitals achieve EBITDA margin of 30%. We have assumed that the four
hospitals have a similar level of profitability.
c) Rental coverage for all four hospitals is 13% of revenue. We derive annual rent for Mount
Elizabeth Novena Hospital at S$62.4m, which is equivalent to 30% of Earnings Before
Interest, Taxes, Amortisation, Depreciation & Rents.
d) Based on NPI margin of 95%, NPI yield of 5% and financial performance in 2019, we
determined the valuation of Mount Elizabeth Novena Hospital to be S$1,185m.
e) We estimated that recurrent revenue for the four Singapore hospitals (excluding nonrepeatable COVID-19-related revenue) increased by 8.5% in 2021 compared to 2019. Thus,
we estimated annual rent at S$67.7m from Mount Elizabeth Novena Hospital and valuation
at S$1,286m.
f) We have assumed aggregate leverage of 40% post acquisition and funding mix of debt 47%
(3Y term loan of S$610m at interest rate of 2%) and equity 53% (private placement of
147.6m new units at S$4.58 per unit (discount of 5% compared to prevailing market
prices)).
• Potential to raise target price. Assuming that the acquisition of Mount Elizabeth Novena
Hospital is completed by end-22, we estimated that the acquisition would be accretive to 2023
DPU by 17% to 17.6 S cents. Our target price would increase from S$4.82 to S$5.42 if PREIT
proceeds with the acquisition of Mount Elizabeth Novena Hospital.
• Accretive acquisition supported by premium unit price. PREITs trades at distribution yield
of 3.2% for 2025F and 3.9% for 2026F due to investors’ preference for sustainable growth in
the healthcare industry and its long WALE of 17.3 years. Its premium valuation supports
accretive acquisitions.
• Step by step. The potential acquisition of Mount Elizabeth Novena Hospital is sizeable and
increases AUM by 57%. Management might consider pursuing the acquisition over two phases
to make the sizeable deal more digestible.
• Adopting half-yearly reporting and semi-annual distribution. PREIT will release its
financial results on a half-yearly basis starting in financial year ending Dec 22. It will also be
making distributions on a semi-annual basis going forward.
EARNINGS REVISION/RISK
• We forecast DPU of 15.1 S cents for 2023 (Year 1), 15.3 S cents for 2024 (Year 2), 15.6 S
cents for 2025 (Year 3) and 18.6 S cents for 2026 (Year 4) based on extension of lease for the
three Singapore hospitals.
VALUATION/RECOMMENDATION
• Maintain HOLD. Our new target price of S$4.82 is based on DDM (cost of equity: 5.5%,
terminal growth: 2.0%).
SHARE PRICE CATALYST
• Step-up in rents from Singapore hospitals in 2026 after AEI is completed.
• Yield-accretive acquisitions, including Mount Elizabeth Novena Hospital.