Citi Research analyst Brandon Lee has lowered his target price on Parkway Life REIT to $3.85 from $4.09 in a model update.
In his Sept 25 report, the analyst notes that his target price is reduced mainly due to the REIT’s higher portfolio cap rate at +36 basis points (bps) and higher discount rate (+40 bps) but mitigated by a higher growth rate of 0.3 percentage points due to the higher Singapore inflation rate.
That said, the analyst has kept his “neutral” call on the REIT due to its implied total return of around 8%.
The analyst has also raised his distribution per unit (DPU) estimates for the FY2023 and FY2024 by 2.1% and 3.2% to 14.68 and 14.99 cents respectively. This is due to the “slight fall in effective tax rate and higher inflation rate” for the REIT’s Singapore properties and mitigated by higher debt cost of 4 bps. Lee’s inflation rate is estimated to be at 4.95% and 4.26% for FY2023 and FY2024, which is up 2.05 and 1.76 percentage points respectively.
To the analyst, key downside risks include the loss of its master lessee, the growth of lower-cost medical expertise and facilities in the region which may draw medical tourists away from Singapore, competition from more medical centres and new entrants in the country, as well as changes in government healthcare regulations.
On the flip side, upside risks include higher-than-expected inflation levels which will lead to higher revenue for its Singapore hospitals, stronger-than-expected rental reversions at its Japan nursing homes, as well as the acquisition of more assets at yield-accretive levels.
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Units in Parkway Life REIT closed 4 cents lower or 1.10% down at $3.61 on Sept 27.
