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Religare Health Trust: Initiated long position at 88c.

Monday, August 24, 2015

I avoided investing in Religare Health Trust although I felt quite positive about the healthcare industry in general.

I avoided investing in the Trust because I was concerned about the weakness of the Indian Rupee against the Singapore Dollar. I was also concerned about the financial engineering involved to make its distribution yield more attractive to investors at its IPO when units in the Trust were offered at 90c a piece.

What financial engineering?

In the middle of last year, I shared a conversation I had on FB that the sponsor waiver to income distributions ended on 31 March 2014. The sponsor held some 28% of the units. So, without the waiver, a proportional decline in DPU for other unit holders should be expected. Of course, if Mr. Market had expected the high yield to be maintained, the Trust's unit price could then decline.




Well, we now know that Religare Health Trust's unit price went on to touch a high of $1.14 on 6 February 2015. Astounding!

The main reason is probably because the Trust has demonstrated its ability to improve its revenue organically quite strongly which makes up for the expiration of the sponsor's waiver to their share of the distributable income. This is quite impressive. Additionally, a gearing level of only 15% gives the Trust ample debt headroom for inorganic growth too.

I know from reliable sources that India's public healthcare system is severely underfunded. So, for those who can afford to pay more and there is a growing middle class in India, they are willing to pay for better private healthcare. This probably explains Religare Health Trust's pricing power.

I have initiated a long position today at 88c a unit which is some 23% lower than the high of $1.14 seen in February this year.

Religare Health Trust distributes income half yearly. Its last DPU was 3.71c. Annualising this would give us a distribution yield of 8.43% with an entry price of 88c a unit.

Sentiments are quite negative about Asian currencies now and we could see Mr. Market selling down the Trust if sentiments worsen. If there should be another meaningful decline in its unit price, I would probably be increasing my exposure to the Trust.

Related post:
Religare Health Trust: Opinions?

24 comments:

imdna said...

Just curious....you're not looking to add the big banks and telcos?

AK71 said...

Hi imdna,

I have so many things to buy on my list. I have to priorities and pace myself. I did add some Starhub at $3.51 today. ;)

AB said...

Hi AK,

Any considerations for Jardine C&C? It has dropped a lot, dividends are quite decent, since 2011.

AK71 said...

Hi AB,

This is not on my watchlist. So, I don't know enough to say anything enlightening about it.

Blue Willow said...

Hi AK71,

I bought the same thing at the same price. Comforting to know I have you as company :)

BW

AK71 said...

Hi BW,

Well, if we fall into a longkang on this one, we won't be lonely. ;p

AK71 said...

"..... the Trustee-Manager intends to pay a special cash distribution (the “Special Distribution”) to Unitholders of 100.0% of the net proceeds of the Proposed Disposal after deducting expenses incurred in undertaking the Proposed Disposal and the Related Arrangements and, if applicable, the Special Distribution Performance Fee payable to the Trustee-Manager in cash if the Whitewash Resolution is not approved by Independent Unitholders, as at a record date following completion of the Proposed Disposal and the Related Arrangements. For illustrative purposes only, approximately S$202.8 million will be available for distribution as a Special Distribution, representing S$0.254 per Unit ...."

Source:
http://rhtrust.listedcompany.com/newsroom/20160204_182521_RF1U_BMXO466NEGDH4C12.1.pdf

AK says:
The special distribution is equivalent to 13 quarters of pre disposal income distribution.
Post disposal, DPU would reduce by about 49% to about 3.65c, all else remaining equal.
Based on an entry price of 88c, it means a future distribution yield on cost of about 4.15%.
If Mr. Market expects a distribution yield of at least 7%, unit price must drop to 52c or so.


ho2786 said...

post special, DPU will drop to 5 cents, not 3.65 cents.

AK71 said...

Proposed disposal of 51% economic interest in FHTL to Fortis. RHT signed a MOU to dispose 51% of its economic interest in FHTL to Fortis Healthcare (FHL) for S$300m (INR14.3bn). RHT currently holds 100% economic interest in FHTL while owning 49% equity. FHTL owns two Clinical Establishments, Gurgaon and Shalimar Bagh, which contribute c.39% of RHT’s revenue.

Management explained that the rationale for the proposed disposal is that RHT can only hold 49% in FHTL due to ownership restrictions and FHL has not received any approval from the relevant authorities to allow the transfer of 51% in FHTL to RHT.

Special distribution of S$0.254. Management plans to distribute all of the estimated net proceeds of S$203m to its unit holders via a special distribution of S$0.254.


Source: DBS Group Research.

redponza said...

The DPU after disposal is 5.56 cents.
To have the same 8% yield, RF1U needs to drop below 0.7 to achieve that.

AK, will you consider divesting the said counter given its strong run after the ex date?

AK71 said...

Hi redponza,

If I were to divest RHT based on that reason, then, I would have to divest my investment in First REIT too which currently has an annualised distribution yield of 6.1% (unit price $1.39 and 3Q2016 DPU of 2.12c). ;p

6+% distribution yield is what Mr. Market expects from Healthcare S-REITs now.

RHT unit price is now 85c. DPU 5.56c gives us a distribution yield of about 6.5%.

Waiting to collect the bumper distribution, at current prices, I won't be selling but I won't be adding either. :)

Coreen said...

hmm why the sudden big drop in price yesterday? couldn't find any information to this...

AK71 said...

Hi Coreen,

Probably because the counter went XD. See earlier comments on the special distribution.

AK71 said...

Religare Health Trust remains attractive to CIMB after its recent divestment of 51% in compulsorily convertible debentures in Fortis Hospital and 100% compulsorily convertible preference shares in Escorts Heart Institute and Research Centre to Fortis Healthcare for net proceeds of $198.5 million. The research house has an "add" call and target price of $1.11.

keng said...

Hi AK,

Any thoughts on their latest Q3 results?

Looks like distribution is slightly affected by the Indian rupee de-monitization.

AK71 said...

Hi Keng,

Some fluctuation is to be expected.

Nothing that worries me. :)

AK71 said...

On 8 November 2016, the Government of India announced the demonetisation of all ₹500 (US$7.40) and ₹1,000 (US$15) banknotes of the Mahatma Gandhi Series.

The government claimed that the action would curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal activity and terrorism.

The sudden nature of the announcement—and the prolonged cash shortages in the weeks that followed—created significant disruption throughout the economy, threatening economic output.

The move was heavily criticized as poorly planned and unfair, and was met with protests, litigation, and strikes.

The move is considered to have reduced the country's GDP and industrial production. As the cash shortages grew in the weeks following the move, the demonetization was heavily criticised by prominent economists and by world media.

Source:
https://en.wikipedia.org/wiki/2016_Indian_banknote_demonetisation

AK71 said...

Weak 3QFY17 DPU post sale of FHTL and demonetisation impact. RHT’s 3Q17 DPU (excl special dividend) fell 34% y-o-y to 1.25 Scts post the sale of its 51% interest in FHTL. Based on a
comparable 3QFY16 DPU, 3Q17 DPU fell 14% y-o-y largely impacted by demonetisation policy which affected hospital income and occupancy rate despite higher ARPOB.

Management expects the impact to continue to be felt in 4Q17 as the full impact from the implementation was only felt in Jan 2017. In addition, management has reduced its cashflow forex hedging policy to 50% in its Dec17 hedging contract.

Debt headroom to support development initiatives. Despite the rise in gearing post FHTL sale, RHT still has ample debt headroom of S$314m (27% gearing as at end-Dec16). This is among the lowest in the S-REIT/property business trust space. This allows RHT to easily support its expansion plans and/or pursue accretive acquisitions including (i) ongoing development projects at BG Road and Ludhiana, adding 279 beds by FY17/18, and (ii) planned asset enhancement initiatives at various clinical establishments, adding 292 beds over FY18/19.

Valuation:
We lower our DDM-based TP to S$0.85 (from S$0.95) on lower FY17F - FY19F DPU (ex-special dividend) of 5.4 Scents to 6.2 Scents (from 8.3 Scents to 9.5 Scents) to factor in FHTL sale.

Source: DBS Research, 7 Feb 17.

keng said...

Based on my rudimentary analysis, NAV is $0.838, so anything close should be a good price point to consider.

AK71 said...

Hi Keng,

Anything below that would make this a rather attractive investment for income.

Patience, AK. Patience. ;p

redponza said...

Hi AK, your dream comes true just one day after your blog post!
Hope you grab some in today's bloodbath!

AK71 said...

Hi redponza,

Yes, I bought some today. I might blog about it tomorrow. ;)

chups said...

hi,

i read the annual report and do these points concern you?

- refinancing risk since weighted avg debt to maturity is 0.8 years
- currency risk - now only 50% of the anticipated cashflow from india to singapore is hedged
- interest rate risk - 66% of its debt is on floating rates

appreciate your take on the above concerns!

AK71 said...

Hi chups,

Investors in RHT should be aware of these issues.

They are pertinent and explain why RHT is not one of my bigger investments for income.

Well, with Fortis' offer now on the table, we no longer have to think about these now. ;p

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