Religare Health Trust (RHT) value that bind or blinds?
Religare Health Trust (RHT) value that bind or blinds?
For the past few weeks I have been
looking at health related securities, be it First REIT, Parkwaylife REIT,
Raffles Medical, Biosensor etc. And then one afternoon while watching an
amusing documentary on YouTube about how brushing your teeth with lemon grass
can make it whiter; an advertisement popped up and Religare Health Trust came
into view.
When I took a quick look at RHT, its
investment story was much sexier as compared to the rest of the previous health
care related securities. Well some investors might say that reading RHT’s
prospectus was like an equivalent to reading the Kama sutra. But as the saying goes. “If it sounds too good to be true, it probably
is; that ‘Kama’ might just be a b****"
So in this post I shall list down the
reasons why this business trust is inherently attractive to value investors
like me and some of points to take note of while investing in this business
trust
The
basics
Religare Health Trust (RHT) is an
integrated healthcare delivery provider in the Pan Asia-Pacific region. RHT is
a business trust with a portfolio that consists of healthcare assets in India.
Listed on SGX mainboard September 25th
2012; raised over $SGD500 million, of which 95% of the proceeds will be
utilized to fund the 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. Their auditor; Ernst & Young LLP.
An update, RHT has now (as of July 25th
2013) 11 Clinical Establishments worth $737m, 4 Greenfield Clinical
Establishments worth $31m 2 hospitals managed and operated by RHT worth $5m.
Greenfield means “yet to build”
Their Singapore office address is at
#11-20 UOB Plaza 2, 80 Raffles Place
The
attractive points
Country/Industry attractiveness: Many RHT
reports starts of by saying that India's healthcare sector is set for growth,
driven by rising disposable income as well as increased healthcare awareness.
India aging population growing by 24.4%, huge healthcare demand/supply gap,
growing affluence of 7.8% CGAR from 2013 to 2015, the average lease terms of
healthcare assets long term 10-18 years (RHT’s average lease is 15 years- with
the view of renewing for another 15 years) and so on. Healthcare is a defensive
sector that should be cash generating in all times and so on. Much has been
said about the attractiveness of the country and industry, but can RHT capture
this growth? My take is, somewhat likely- do continue reading
RHT policy positioning: RHT is
positioned to benefit from a rise in India's healthcare revenues via its current
fee structure which allows it to share into underlying hospital revenues. With
a based service fee consisting of fixed quarterly payments with 3% escalation
per annum- upward revision for any capex/ expansion and a variable Service Fee
consisting of 7.5% of the Fortis Operating Companies’ Operating Income for each
quarter simply enable RHT to capturing the growth of the hospitals through a
fixed fee and the sharing of operating profits. But is their assets (hospitals,
clinics etc) well located? Just like investing in a REIT, the location of where
the building is, the catchment area, potential new supply in the area, façade,
size, age of the hospital, the income growth in that area and whether the asset
provides a need or a want to the targeted customers is vital to how a REIT will
perform. I did due diligence on this part and this is what I have found
RHT asset positioning: Because I am now actively looking for
a career, I cannot simply take off to India and visit all 17 properties
diversified all over India. If I could, I will, but luckily there is something
called google maps and I used it to my advantage by checking the location of
every single properties that RHT has acquired. What I looked out for is city or
factory activities near the clinics (the foundation of health care demand),
whether it is easily accessible- be it high ways, roads, etc (the convenience
factor) and the current competitors in the area. I like most of the assets that
RHT bought, moreover during the AGM held on july 25th 2013, the management
was questioned on their knowledge and ability to pick good yield accretive
assets in India; I was satisfied with their answers, nonetheless. However there
were still some buying decisions that bothers me, which I will elaborate
further under the “the un-attractive points)
RHT asset organic growth: Recall
that RHT has a variable fee component; 7.5% of operating fees. This means that,
if more beds are built per clinic or hospitals, more income can be derived for
the unit holders assuming that there is demand for such beds. A quick observation reviews the following;
RHT has about 1870 potential beds (yet to be installed) and 3197 installed beds
(just built). Revenues from FY 12 to FY
13 have increased on average about 15-16%, lowest 7% which is in Nodia and
highest 55% in Shalimar Bagh.
Low Gearing: As of July 25th 2013, RHT
gearing is 8.9%, which is low as comparison to peers (Like First REIT ,
Parkwaylife). RHT has an estimated “debt room” (means can borrow, but doesn’t
mean it will or able to borrow) of about 350million. Cost of debt is 4% for
RHT. This is one of the points excited me greatly, because financially; RHT has
yet to leverage effectively to increase its NAV and DPU. RHT’s has target
gearing of 30%-40%, about S$250mn to S$400mn of debt headroom could be deployed
to finance the capital expenditure. Comparing with other related securities
Ascendas India Trust has a gearing of 33.0%, Parkway Life REIT 36.4% and First
REIT 15.9%;
Strong sponsor: One of
the key risks in investing in healthcare REITs is the idea of counter party
risk; such that the master lease agreements are only as safe as the strength of
the counterparty, example if Lippo Karawaci collapses First REIT I think will
collapse as well, as the former contributes 90% of First REIT’s revenue.
Likewise for RHT, Fortis Healthcare is the sponsor and looking at the sponsors
balance sheet and business health, I find the following. As of March 31, 2012,
Fortis operated its healthcare delivery network in India, Australia, New
Zealand, Hong Kong, Vietnam, Singapore, Mauritius, Dubai, Sri Lanka and Canada
with 75 hospitals, over 12,000 beds, over 600 care centers, 191 day care
specialty centers and over 210 diagnostic centers. On April 27, 2011, it
acquired Escorts Heart Institute and Research Centre Limited. Over the last
five years (FY07-12), Fortis Hospitals have delivered an organic CAGR of 21%.
Fortis also has 28.0% stake (220.7 mn units) in RHT
Foreign exchange risk: No longer
a concern as forward contracts were used hedge the currency risks until March
FY 2015
Attractive yields and ratio comparable: At a share price range of 0.85- IPO
0.9- highest 0.98 cents, taking into account 100% distribution payout over
Forecast Year and Projection Year. Sponsor distribution waiver over Forecast
Year and Projection Year, the expected yields for FY2014 would be around 9.2%
at 0.85 share price, 8.8% at IPO share price and 8.1% at a share price of 0.98
cents. Comparatively First REIT’s yield is around 6.3-7% and Parkway is around
4-5%. RHT’s NAV per unit is $0.91 thus PTB would range between 0.93 or 0.98 or
1.1
Now
for the unattractive points:
Country attractiveness gives raise to
concentration risks:
The initial portfolio is located in
India, which exposes RHT to country concentration risks. RHT’s hospital
occupancy can fall in the event of a downturn in India’s healthcare sector,
political strive and therefore adversely impact RHT’s revenue and depreciation
in property value of RHT’s portfolio. In addition country's attractiveness is very dependent on how India's economy is doing in general; why? Because RHT target market is the (if im correct) middle to upper class patients. With the onset of current weakness, high current a/c deficient, government refusal to improve on productivity and protectionist policies, it brings into question the expected growth of the middle income people in India.
Questioning the Industry
attractiveness/ asset positioning: There is a popular idiom that says
that you can attract more flies with honey than vinegar, but I say that you can
catch even more files with manure than vinegar or honey! You see, every analyst report on RHT I’ve
read, attempts to persuade investors by starting off with rosy complements on how very attractive the
healthcare industry that RHT is in, that there is lots of growth, lots of
demand and so on. But if you dig a little deeper, you will find that every
hospital or clinic that RHT has bought is either near another competing
hospital or clinic. And it’s not just one or two hospitals or clinics that
competes with fortis, there are as much as 6-10 of competitors vying for
patients. Like for example; when I looked at Fortis Malar Hospital on No 52, First
Main Rd, Gandhi Nagar, Adyar there is another 6 other hospitals within a radius
of 10kms (see figure 1) and when I google map hospitals in Chennai”, I got a
ton of other clinics and hospitals, popping up like chicken pox in the same
area (see figure 2). The question I would ask myself is, how is RHT going to
compete with so many competitors like Vijaya Hospital; Apollo Hospital, Manipal
Hospitals and and to a lesser extent, government-owned hospital, smaller
private hospital groups and new entrants; and if they are able to compete
effectively with these competitors how do I tell?
Figure 1:
Figure 2:
Figure 2 notes: One way to tell whether the
hospitals are well maintained, is to check the car park of the building; if
that is well maintained, so will be the rest of the hospitals! What I found out
is in India, just like Indonesia, if you are from the middle class, going to a
public hospital when you are ill is not an option. The public hospitals are
crowded; people from all over India come to government hospitals (cause it is
cheaper) so you have people camping all
over the corridors, on the staircases, they bring their families and their
extended families. So for the middle to upper classes, going to a public hospital
is not likely as the que is very long as well.
From the prospectus, it says that the
there is a yield waiver period; that the sponsor will not take their
entitlement on the 100% net property income distribution payout for both FY13
(Mar) and FY14 (Mar). I am quite certain that this policy acts as a sweetener
to potential investors to buy into RHT’s IPO. But from FY15 onwards, hear this…
there will be no more sponsor waiver and the payout drops to 90%.
So let’s assume that, RHT is able to
meet the forecasted dividends for FY2014 at ~9.6%. Assuming they sustain
revenue into FY15, and taking into account -2.5% when sponsor waiver lapses,
and payout drops to 90%, the dividend then falls to 7.1% from FY 15 onwards.
By stripping out the distribution
wavier, RHT’s yield drops to 7.1%. So Is 7.1% an attractive yield? I look at an
immediate alternative, the India 10 year government bond, yielding around 8%. Wouldn’t the latter be a better alternative? Some
argue that RHT yield can continue growing and that the government bond cannot.
So a lot depends on RHT’s utilization of debt and whether its hospitals can
perform as they claim to be in their prospectus. But if RHT cannot deliver its
promises, man! Unitholders are left with quite a bad bargain.
On
valuation
CIMB securities research indicated a IV
of $1.07 (as of June 2013), the valuation method used was pro-forma income
statement with a Gross Property Revenue of $SGD 146m and a distributable profit
of $SGD 67.49m by march FY2016. One thing to take note of, is that by next year
FY2014, the CIMB analyst expects RHT to deliver a core EPS growth of 174% and
if RHT cannot deliver this promise, the IV will fall. An overall analysis of
the CIMB analyst’s valuation method and on its IV of $1.07 per share for RHT, I
would say it’s either a conservative or she doesn’t know what she is doing.
Some readers might question me, why the analyst bashing again? Simply because
in FY2014, the analyst forecasted a Distributable Profit of $SGD 46.56million
out of $SGD 66.24 million Net Property
Income; this represents only a 70% payout policy for FY2014; but recall that in
the prospectus the agreement was a 100% of the net property income for FY 2013
and FY 2014? Perhaps I’m wrong with some accounting definitions; but until
someone corrects me, a target price of $1.07 is not a reliable price I would
base RHT on.
How I would value RHT is simply giving
it a unit price range. For RHT’s upper bound ( the optimistic case- how much
RHT unit price can go up to) I would use first REIT’s PTB multiple by an
estimated no. of years RHT can reach first REIT’s standard, while adjusting the
NAV (by taking out 100% of the intangibles) for RHT’s lower bound (the
pessimistic case-how much RHT unit price can fall).
Let me explain further,
For RHT’s upper bound, I would use
First REIT’s latest PTB multiple and multiply it to RHT’s net asset value in 4
years’ time. Why use First REIT? Cause environment which First REIT’s
properties are on, the way the management fees are structured as well as the
strategies used to acquire properties is very similar to that of RHT, to me RHT
could be another young First REIT if you will.
Why 4 years? Cause it took First
REIT’s management about 4 years (not considering 2008) to build that
reputation, to show results, to meet or exceed expectation and again confidence
with investors in order to garner a unit price of $1.225 (as of July 2013)
which represents a PTB multiple of 1.36 times.
Applying the law of conservatism, let
just assume that in 4 years’ time, RHT net asset value per share is just $1 (currently it’s 0.90), I take 1.36
times multiply by $1 and get $1.35 per share in 4 years’ time. I discount $1.36
by a discount rate of 10% and added in the dividends for the next 4 years
(using the CIMB forecasted dividends FY2013: 0.03, FY 2014: 0.082, FY2015:
0.081, FY2016: 0.085) I get an upper bond IV of $1.25.
So in a nutshell; RHT’s unit price can
reach $1.25 provided is can deliver its results, give investors the confidence,
such that in 4 years’ time the unit price is worth $1.35 and it delivers 4
years of dividends 0.03, 0.082, 0.081 and finally 0.085 by 2016. Then RHT’s
unit price is thus worth $1.25
For RHT’s lower bound share price; this is how derived it
I took RHT’s Net assets as of march
2013: $SGS 714,510,000
Less off its Intangible assets: $SGD
149,594,000 divided by
Total shares: 788,131,944 and get
An adjusted NAV of $SGD 0.716
In a nutshell, I still think RHT is a 'potentially' great REIT to buy into, however do note that if the latter cannot deliver,
it means that the intangibles such as the “name of having Fortis on its
hospital front” has little or no value to me and it’s unit should be worth
around $SGD 0.716. It could go even lower if, RHT’s competitors take the bulk
of the market share.
As of 28th August 2013: RHT is now at $0.755. The good news is, that most of the economic woes of India should be priced into $0.755
As of 28th August 2013: RHT is now at $0.755. The good news is, that most of the economic woes of India should be priced into $0.755
Verdict: Buy with caution
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