Religare Health - Exposure to India healthcare

• A portfolio of 12 clinical establishments under the Fortis Healthcare brand

• Low gearing of 13.6% gives ample headroom for acquisitions

• FY16 DPU yield of 7.8%

Background
Listed in October 2012, Religare Health Trust (RHT) is a business trust with a current portfolio of 18 healthcare assets (12 clinical establishments, 2 operating hospitals and 4 greenfield assets) located in cities across India. These assets have an appraised value of SGD991m as at 31 March 2015. Its sponsor, Fortis Healthcare (which holds a 28% stake in RHT), operates 15 of these assets under a 15-year operating agreement (with an option to extend by a further 15-years). It has a distribution policy of at least 90% of distributable income on a semi-annual basis. We met with management (CEO Gurpreet Dhillon and CFO Pawanpreet Singh) recently for a business update.

Highlights
RHT derives a service fee from its clinical establishments which consist of 2 components: 

1) a quarterly base service fee with a 3% annual escalation, as well as 

2) a variable service fee amounting to 7.5% of operating income. 

Currently, the fixed fee component makes up around 70% of overall service fee revenue. RHT’s FY15 (March yearend) service fee increased 27% YoY, largely due to an acquisition (the Mohali clinical establishment) completed in May 2014. According to management, excluding this acquisition, FY15 variable fees grew by 12% YoY.

Looking ahead, management expects organic growth in service fee to come from its capacity enhancement initiatives – it is seeking to add a further 492 hospital beds (representing a 19% increase in its current operational bed count) at an expected cost of SGD47m over FY16.

Given also that the majority of Fortis Healthcare’s hospitals are focused on delivering higher-end tertiary and quaternary healthcare (5 of its clinical establishments are JCIaccredited), demand for its services is expected to remain robust, supported by improving average revenue per occupied bed (ARPOB) and high occupancy rates (average occupancy rate was 75% in 4QFY15).

RHT’s gearing is relatively low at 13.6% (FY15). Management believes this provides ample headroom for future acquisitions to drive distribution-per-unit (DPU) growth – an increase in gearing to 60% will provide an additional SGD1.04bn in potential funding, according to the company.

Although RHT has a right of first refusal to its sponsors’ healthcare assets, management said future acquisitions outside the Fortis Healthcare portfolio could be assessed, should suitable opportunities emerge. In addition, of RHT’s four greenfield assets, it is in the process of developing one – a 79- bed quaternary hospital in Ludhiana to be constructed at an expected cost of SGD19.7m, targeted for completion in 4Q FY16. Management said its other 3 greenfield projects remain in the planning stages and are unlikely to commence development in the near term.

Currency fluctuations are a key risk for RHT, as asset valuations as well as revenue are derived in INR, while distributions are paid out in SGD. To manage this, RHT hedges its distributable income on a 1-year forward basis. Also, 100% of its debt is currently denominated in SGD.

However, management said that going forward it could take on INR denominated debt to fund future development costs – these loans would subsequently be refinanced in SGD upon completion. This would enable it to further hedge its INR exposure during the developmental stages of its properties.


Technical Analysis
Daily Chart
Valuation
According to the Bloomberg consensus, RHT is trading at FY16 and FY17 DPU yields of 7.8% and 8.7% respectively. It also trades at around a 4% premium to book value of SGD0.968 as at 31 March 2015. (Read Report)

Source : Daiwa Capital Markets

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