Parkway Life Reit

CIMB Research, June 3

PARKWAY Life Reit (P-Reit) has de-rated 5 per cent since our downgrade on May 2, 2014, which was largely premised on expensive valuations.

P-Reit is fundamentally attractive. Aside from being in a resilient industry, P-Reit benefits from favourable lease structures such as a long-lease term to expiry, downside protection for 91 per cent of its revenue and CPI-linked rental review for 67 per cent of its portfolio. The Singapore hospitals alone should drive organic growth of 2.7 per cent over the next two years, assuming a CPI of 3 per cent.

P-Reit's exposure in Japan positions it as a proxy for Japanese reflation. More importantly, its early entry and good working relationship with Japanese nursing home operators allow P-Reit to consistently make yield-accretive acquisitions despite rising competition.

We expect more acquisitions given its healthy gearing of 35 per cent and debt headroom of $131 million-$287 million. Aside from Japan, Australia and Malaysia are potential markets.

The yield spread for P-Reit against 10-year government bond yields has widened from 175 basis points (during our downgrade) to 275 basis points.

While this remains below the S-Reits' simple average of 3.8 per cent, we believe this is a more reasonable level given P-Reit's stability.

"Hold" for a stable Reit with about 5 per cent dividend yield. We have only factored in organic growth, but estimate that a $100 million acquisition at NPI yield of 7 per cent could raise our target price by 5 per cent to $2.53.

HOLD