Parkway: Kitchen sinking - HOLD (DBS)

HOLD (maintained) $1.17 (STI: 1,1617.44)
Price Target: 12-month S$1.28
PE (X): 2008A - 31.9, 2009F - 14.5
Net Div Yield: 2008A - 2.1%, 2009F - 5.2%

FY08 headline profit fell by 88% to $34.8m on several one-off charges. Excluding those items, net profit at $89.8m was within expectations. We expect to see launch of sale of medical suites by mid’09. Restructuring and cost savings may provide upside to our forecasts. However, we believe uncertainty over take up of medical suites and high cost of investment may cap gains in near term. Maintain Hold, TP: S$1.28.

Excluding exceptional one-off items (see pg 2), Parkway’s net profit at $89.8m was within our expectations. Revenue grew 9% to S$945.4m on contribution from its Hospital and Healthcare divisions. Admissions for Singapore dipped 3.8%, offset by 10% in day cases. As a result, average occupancy dropped to 59.9% (FY08), from 64.6% (FY07). Revenue PAPD (Per Adjusted Patient Day) in Singapore grew 6% to S$1,853. Group operating margins dipped by 2.1% on higher rentals (paid to the REIT), partially offset by a lower increase in depreciation and staff costs.

As indicated previously, we do not see funding issues for its Novena hospital project. About $1bn of loan has been drawn down with additional $300m facility available. The Group has $542m in cash. Net D/E stands at 0.53x with an interest cover of c.9x. The Group is expected to launch first phase of 80 units of medical suites in mid’09, at ASP between $3,200 to $5,000 psf.

Valuations appear to be low relative to historical value. There could be upside in our forecasts arising from its restructuring and cost savings. However, we believe the uncertainty over the take-up rate and ASP of the medical suites at the new Novena Hospital would continue to weigh down this counter in the near term. As such, we maintain our Hold recommendation. Our TP of $1.28 is unchanged.