News/ Comments

• Parkway Life Japan4 Pte Ltd (Investor), a special purpose entity of Parkway Life REIT which in turn is an indirect 35.72% owned subsidiary of IHH Healthcare had on the 17th Feb entered into a “Tokumei Kumiai” or silent partnership with Godo Kaisha Samurai 12 (Operator).
• Pursuant to the agreement, the purchase price amounting JPY4,759m (circa RM187.3m) will be injected into the “operator” by the “investor” to facilitate the acquisition of 5 nursing home facilities in Japan with a total of 391 rooms, subject to a number of conditions.
• Although Parkway Life REIT doesn't have an equity interest in the “operator”, pursuant to MFRS10, the operator is still regarded as a subsidiary of IHH. The arrangement sees IHH group receiving majority of the benefits relating to the operation and is exposed to majority of the risks and residual or ownership risks of the operator and its assets.
• Post acquisitions, this will bring Parkway Life REIT’s exposure to Japanese assets up to 38% from 36% currently. The acquisition will be wholly funded by Parkway Life REIT and as such won’t affect IHH’s current gearing of circa 0.21x. Post- acquisition, gearing for Parkway Life REIT will increase to 0.375x from 0.36x. The acquisition is at a 9.1% discount to market valuations and as such is earnings accretive.
• The properties will be on long-term master leases with 20 to 30 years remaining. The long balance lease arrangement serves to further improve the lease expiry profile of Parkway Life REIT’s entire portfolio by lengthening the lease term from 8.44 years to 9.81 years.
• Financial implications: As at 9M16 Parkway Life REIT has contributed circa 11.5% to IHH’s EBITDA. We don’t expect this “investment” to have any material impact to the IHH Healthcare in FY17.
• We expect this acquisition to be long term positive as the aged care industry is expected to grow in Japan as fertility rate falls below the replacement rate and life expectancy increases. Currently, a quarter of the population demographic is skewed towards 65 years or older.

Catalysts

• Strategic geographic footprint in key gateway markets. Ageing population profile and rise in affluence in key markets will support demand for high quality healthcare.

Risks

• Risks to this stock arises from exposure to regulatory risk and intense competition in the private healthcare sector space and FOREX risks due to its global earnings base. Political risk in Turkey has also heightened in the past 12 months

Forecasts

• Forecast remains unchanged pending FY16 results later this week.

Rating

HOLD ↔ TP: RM6.32↔

• Whilst we like IHH for its exposure to key gateway markets, good management and strong reputation, earnings delivery in the near term will be hampered by higher pre-operational costs as the new hospitals are likely to take time to mature.

Valuation

• Reiterate HOLD call with unchanged SOP-derived TP of RM6.32 .

Source: Hong Leong Investment Bank Research - 20 Feb 2017