Parkway Holdings: Results boosted by exceptionals

Parkway recorded 2Q09 revenue of S$258.6m (+10% YoY), on the back of strong performance from its International Hospitals and its Singapore Healthcare segments. Operating profit came in at S$39.4m (+14% YoY) for the quarter, which was in line with our estimates. Net profit rose 42% YoY to S$40.3m, boosted by the S$17.2m reversal of allowance on impairment of receivables, which Parkway had booked in 4Q08. Factoring in this exceptional gain, we would be raising our earnings estimate for Parkway accordingly. We are likely to maintain our SELL recommendation for Parkway, as we feel that current valuation is rich and net gearing of 0.46x is relatively high, compared with peers. However, we are likely to raise our P/E valuation (from 13x), as its peers are trading at an average of 14x forward P/E. No dividends were declared for this quarter.

International hospitals remain the growth driver. Revenue from International Hospitals climbed 33% YoY, due to increased patient volume and revenue intensity at its Pantai Hospitals and its Brunei cardiac centre. The improved performance was also attributed to the additional contribution from Gleneagles Hospital KL (GHKL), as Parkway had raised its stake in GHKL from 30% to 58% in 4Q08.

Singapore hospital revenue declined, but healthcare segment grew. Foreign patient numbers continued to decline in 2Q09, attributed to the global economic slowdown and the H1N1 outbreak. This was mitigated by Parkway's introduction of 40 medical packages to see treatment at its hospitals. These packages were introduced in 2Q09, and saw strong local demand. Hence, revenue from its Singapore hospitals dipped 3% YoY during the quarter.

Its Parkway Shenton group of clinics secured several major new corporate contracts during the quarter. It was also awarded a contract from the Ministry of Health, to conduct temperature screenings at all entry points into Singapore. This new contract and as more patients sought flu vaccinations at its clinics, helped to boost the performance of its Healthcare segment.

Exceptional item. Parkway made a provision for impairment loss on receivables amounting to S$34.4m in 4Q08. As at end 2Q09, it had reached a settlement for these receivables and hence, wrote back excess allowance of S$17.2m.

Valuation and recommendation. Its peers are currently trading at an average of 14x forward P/E. We will be raising our earnings estimates for Parkway, taking into account the write back of the receivables that it had provided for in 4Q08. We are also likely to raise our P/E valuation and hence, our target price will be adjusted accordingly.

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Parkway Holdings Limited: Continues on a good growth trajectory

Brightening outlook. Parkway Holdings (Parkway) reported its 2Q09 results with topline of S$258.6m (+10% YoY, +8.7% QoQ) and PATMI of S$40.3m (+47.6% YoY, +89% QoQ). Excluding exceptional items, 2Q09 bottomline would have been S$30m (+7% YoY, +28% QoQ). The results were better than expected as its Singapore operations were not as bad as expected and its International Hospital and Healthcare segments delivered strong double digit growth. The taint in the results was the writeback of only S$17.2m (final settlement) out of S$34m bad debt provision.

Hospitals: International buffers Singapore performance. Singapore hospitals' showed encouraging QoQ improvements (but still down YoY) in both patient admissions and days stayed. The well-received 40 elective surgeries helped buffer revenue. Therefore FY09 might be able to show a flat performance. Parkway's international hospitals continued on its topline growth trajectory (+33% YoY, +11% QoQ), driven by its Pantai Hospitals, increased patient loads at its cardiac centre in Brunei and consolidated revenue of Gleneagles KL.

Healthcare: keeps up performance. The segment's good showing (+23% YoY, +9% QoQ) was driven by Parkway Shenton's clinic network as it secured new corporate contracts as well as a government contract for temperature screening at all border points. Fees were also accreted from its management project in the Abu Dhabi Hospital. Cost containment and government incentives helped accentuate Healthcare's EBITDAR growth by 66% YoY.

Crystal balling Novena. Parkway management has updated that changes in the construction schedules will push the Novena Hospital opening to 1H12 (prev. 2H11). The move is a double edged sword as Parkway expects to save S$100-150m in construction costs with lower construction costs but pushes Novena's breakeven far out to 2017. Parkway will only obtain the Building Permit and the right to sell its suites in 1Q10. Therefore, we have pushed the sale of medical suites back to 2010, albeit at the same prices (S$3500psf) and number of suites (80 units).

Upgrade to BUY. We have raised our estimates with its brightened outlook and re-peg Parkway to 20x (prev. 15x) FY10F as risk appetite returns. Our fair value is now S$2.22 (prev. S$1.28). Parkway did not declare any dividends in a bid to conserve cash. We have cut our dividend forecast to 1.25 S cents for both FY09 and FY10. H1N1 proliferation will pose significant risk to our estimates as people travel less and avoid elective procedures in hospitals.

Parkway - Raise price target to S$2.35

We raise our earning estimates and price target as we expect a strong rebound in patients in view of the economic recovery. We maintain our Buy rating on the company, which is a prime beneficiary of the ageing population in the region. We raise our 2009/10/11 EPS estimates from S$0.07/0.07/0.07 to S$0.09/0.10/0.11.

We expect foreign patient numbers, which make up about 35% of its Singapore volume, to record a rebound in H209 after witnessing a decline for several months. There are cheaper alternatives in the region but we believe Parkway’s established reputation, connectivity by air, and areas of expertise give it competitive advantages.

We have assumed that it will sell its Novena medical suites at a break-even price of S$2,500 psf in 2012 but management has indicated that given the rebound in the property market, it may try to price a third of these suites at S$3,500 psf in 2010. If it succeeds, it would add a further S$0.15 to our valuation, and 47% and 92% to 2010 and 2012 earnings estimates, respectively.

The stock is trading at 18.4x 2010E PE, a 30% premium to the market but 22% below its 10-year mean. Our price target is based on DCF with key assumptions being a WACC of 6.5% (previously 7.1%) and terminal growth of 3%. The change in our WACC assumption is due to our lower risk-free rate assumption (-0.5%) and higher (by S$300m) debt assumption.

Parkway Holdings - Positive long-term prospects

Parkway will likely continue to position its Singapore hospitals to attract foreign patients while seeking growth in other Asian markets. The group is well positioned regionally, with a footprint in Malaysia, Brunei, India, China and Vietnam.

Management said that its healthcare services subsidiary, ParkwayShenton (unlisted), was awarded the border H1N1-screening contract, with a potential top-line contribution of S$2-3mn/month. The group also has seen minimal impact on patient volume despite the H1N1 situation. Management guided its patient volume has recovered in June, with flat revenue growth y-y. Revenue intensity, however, has not improved.

Malaysia. The group’s Pantai Hospital (unlisted) is looking to grow its top line by 20% to 30% annually and plans to expand by about 1,000 beds to 3,300 beds in Malaysia. The group is building a new 300,000-sf block at Pantai Hospital in Bangsar, of which 150,000sf will be medical suites for sale. China. Through Worldlink (unlisted) (Parkway Health China), Parkway will add two more clinics to its current six and add three more dental locations in Shanghai.

The group is looking to market the Novena medical suites to doctors, who currently do not own their medical suites. Parkway is looking to sell the first phase with 88 units out of a total 200 units (200,000sf) when it receives approval, which is slated in 2H09.

Parkway Holdings - High gearing relative to peers

As the largest private healthcare provider in Singapore, Parkway is likely to be the most affected in the economic downturn, with fewer medical tourists. This is expected to be offset by an increase in outpatient treatments and growth at its International hospitals. Its recently-launched 34 fixed-fee packages are expected to help mitigate the decline from in-patient admissions. We are maintaining our SELL recommendation on Parkway as its net gearing of 0.5x is relatively high, compared with its peers and current share price is rich.

Fewer medical tourists. A weak economy, coupled with the H1N1 outbreak is likely to result in foreign patients postponing seeking medical treatments in Singapore. The weak economy would deter discretionary spending on elective procedures, while other patients put off travelling to Singapore over flu fears. This would negatively impact foreign patient loads at its hospitals.

Rise in outpatient cases to partly offset decline in in-patient. In-patient admissions are expected to decline, given the weak economy and fewer medical tourists. However, this is likely to be offset by an increase in outpatient treatments (day cases) and growth from Parkway’s International hospitals. Patients tend to opt for outpatient treatment, if they can, during an economic downturn.

Overseas operations expected to grow. Parkway expanded the capacity and added new facilities at its regional operations. With a bigger capacity and more medical facilities, it would be able to meet the growing demand for its services. It is also currently carrying out construction works for its Mumbai hospital. Fixed-fee packages to help mitigate decline in Singapore hospitals in-patient admissions. Parkway has recently launched 34 fixed-fee packages that cover various surgical procedures.

Maintain SELL. Although operating cash flows are stable, Parkway’s net gearing of 0.5x at end 1Q09 is high, compared with its peers. Both Raffles Medical and Thomson Medical are in net cash positions. Current valuation for Parkway is also rich, with the stock trading at 23.6x forward P/E.

Parkway Holdings - Improved Singapore patient load in April

The group’s Singapore hospital operations are seeing improved patient demand with inpatient growth improving in April compared to the contraction seen in the first quarter. Occupation grew from 58% in the 1Q to 62% in April. With more inpatient and surgical procedures, revenue intensity was also stronger. However, outpatient growth, which was strong in the first quarter, saw some pullback.

The launch of its fixed-priced packages has met with encouraging response, with 250 packages sold in the first month since it was launched. Management attributed the progress in in-patient growth to increased demand from local patients since the public sector experienced capacity constraints. Management also highlighted that the recent decision to raise the limits on the use of Medisave for surgical procedures will likely help increase demand for private healthcare in Singapore.

As the group develops its new Novena hospital, there is a plan to designate its hospitals by speciality. For example, Gleneagles could focus on liver transplant, women and child and ophthalmology. Mount Elizabeth could focus on oncology while the new Novena Hospital could focus on cardiology. Meanwhile, the group continues to strengthen its pool of specialists with a group of doctors from the US looking to start up in October 2009. In addition, some specialists from the public sector seem to be looking to start their practice at Parkway hospitals.

The group is awaiting the building plan approval for the Novena Hospital and may look to market the medical suites by the end of the year. Management hopes to award the construction contract by the thirdquarter and save up to S$100mn in construction costs due to lower material prices. The group is looking to market the Novena medical suites to doctors, who currently do not own their medical suites. Parkway is looking to sell the first phase, with 88 units out of a total 200 units (200,000sf).

The group is actively looking to manage costs, eg, the group is expected to save S$5.5mn from wage restructuring, S$10mn from bulk purchasing and another S$5mn from general cost-saving initiatives over the next two years.

New private cancer hospital to open in 2011F. Pacific Healthcare, a listed specialist clinic chain in Singapore, has recently announced its plan to redevelop the Adam Road Hospital site into a private cancer hospital to be opened in 2011F. This S$42mn investment reaffirms our positive sector view on robust demand for private healthcare in Singapore even in the current recession. The key demand drivers include: 1) rising affluence of local population, 2) tight capacity at public hospitals, and 3) medical travel.

Raising price target to S$2.14/share, suggesting 34% potential upside. Since our initiation on 3 March 2009, Parkway’s share price has increased 52% (vs a 48% increase in the STI Index over the same period), on the back of improved market sentiments and a strong 1Q09 result. We are raising our price target from S$1.85 to S$2.14 by increasing our target earnings multiple for the overseas operations to 16x FY10E (from 13x FY09E) to reflect its strong growth and by updating our marked-to- market valuation of Parkway Life REIT. We believe the next re-rating catalyst will be the impending sale of the Novena medical suites, which may surprise positively given the recent buoyant property market.

Parkway - New fixed price packages likely driving day-case volume growth

We have compared the prices of Parkway’s 34 recently-launched fixed price all-in surgical packages, against the average bill sizes of similar procedures published by the other public and private sector hospitals in Singapore.

We observed that while the prices of Parkway’s new packages for day surgeries are below the median prices of similar procedures at most of the costly public facilities and those at Raffles Hospital, inpatient procedures, especially those requiring a longer length of hospital stay, are priced higher than the 90th percentile bill size.

With the discounted prices lasting till end of March 2010, our findings reaffirm Parkway’s near-term focus on driving day-case volume growth to partly mitigate falling inpatient admissions. Similarly, we see Parkway strategising on maintaining its premium franchise in complex procedures within the global medical travel context.

We have kept our earnings forecasts and investment thesis intact, and assume that Parkway would likely launch the sale of its Novena hospital medical suites in FY10E. Our SOTP-based target price is S$2.85. We maintain our OUTPERFORM rating.

Parkway Holdings Limited: 1Q09 indicative for 2009

Indicative quarter for 2009? Parkway Holdings (Parkway) reported its 1Q09 results on Friday with topline inching 4% YoY ahead to S$237.8m while PATMI rose 9% YoY to S$21.3m. Excluding impairment loss of Auric Pacific, Parkway's bottomline would have risen 20% YoY to S$23.4m. The group has not resolved the S$34.4m of outstanding debt incurred in 4Q08, but is confident of retrieving the full amount. Parkway is finalising plans with Colliers for the launch of its first tranche of Novena Medical Suites. As such, no sales were booked this quarter.

Hospitals: International will buffer Singapore performance. In line with our estimates, Singapore hospital performance started the year with a slide of 9% in topline in view of shorter hospital stays coupled with lower inpatient stays. However, its International hospitals have exceeded our expectations by growing revenue to S$54.8m (+26% YoY, +6% QoQ). This growth was primarily due to its Pantai Hospitals and increased patient loads at its cardiac centre in Brunei. In addition, the group also started consolidating revenue of Gleneagles Kuala Lumpur after raising its stake from 30% to 58% in Nov 08 and started recognising revenue from its management project in the Abu Dhabi Hospital.

Healthcare: Driver for FY09. With patients putting off elective surgeries and performing more diagnostic tests, a significant shift to outpatient treatment was seen through an almost double-digit rise in day cases. This boosted the Healthcare segment's revenue by 13% YoY to S$72.7m. Higher intensity of procedures performed helped to raise productivity and accentuated Parkway's EBITDAR's ascent by a greater magnitude of 27% YoY. The recently launched "Fixed-fee surgical packages" that are 10- 15% discounted from original prices will continue driving its day cases.

Fair value raised, but maintain HOLD. We have tweaked our estimates to account for Parkway's successful push for more outpatient treatment along with an anticipated strong performance from its International Hospitals. From a core operations standpoint, we raise our estimates to S$83.7m (prev: S$75.6m) in FY09 earnings. Our fair value is raised to S$1.28 (prev: S$1.15) on the same valuation peg of 15x FY09F EPS. While operationally sound, uncertainties still exist for the take up of its first launch of the medical suite sales which can change the dynamics for loan repayments. We will be incentivised to re-look the peg upon strong suite sales take up along with sustained cost containment and International division performance. Maintain HOLD.

Parkway Holdings: Boosted by international operations

1Q09 net profit was up 9% YoY to S$21.3m, and revenue growth of 4% YoY to S$237.8m was in line with our estimates. Included in 1Q09 results was impairment loss of S$2.2m for its investment in Auric Pacific. Excluding exceptional items, net profit would have grown 20% for the first quarter. The growth in revenue was largely helped by its International operations (37% and 32% of 1Q09 and 1Q08 Group revenue, respectively), which grew by 20% YoY, thanks to healthy patient volumes.

Foreign patient volume at Singapore hospitals expected to remain low. Singapore visitor arrivals are expected to continue to decline, as the recession continues and the H1N1 virus deter discretionary travelling. This is likely to translate to lower foreign patient volume as patients put off seeking treatments in Singapore. If the H1N1 virus outbreak becomes more widespread, overall patient volumes (both local and foreign) could decline as patients avoid visiting healthcare establishments (e.g. radiology centres).

Maintain SELL. Management’s continual implementation of cost-cutting measures across all operations would help to cushion revenue impact from decline in patient volumes at its Singapore hospitals. The growth in its Singapore Healthcare segment (as more patients opt for outpatient treatment) and International operations are also expected to offset the decline in the Singapore Hospital segment. We are maintaining our earnings estimate of S$78.0m for FY09. Our target price of S$0.92 is based on 13x blended forward earnings. The stock is trading at 18x forward PE, which is unattractive compared with its peer average of 12x.

Parkway Hldgs: Helped by international contribution

1Q09 within expectations. Headline net profit of S$21.3m (+9% y-o-y) was within expectations. Revenue grew +4% to S$237.8m, thanks to growth from overseas and Singapore Healthcare contribution.

Lower Singapore admissions. As a result of lower foreign patient admissions, revenue for Singapore Hospitals dipped by 9% to S$108.8m on lower admissions (-3.7%), offset by higher day cases (+8.8%). As a result, average length of stay dipped to 3.34 days, from 3.65 days in 1Q08. Net revenue per patient day declined -2.8% to S$1,811. Occupancy slipped to 58%, from 61.5% a year ago.

Offset by other operations and cost savings. Topline for the Group's International Hospital and Healthcare services divisions grew by 26% and 13% respectively. In addition, cost containment measures and savings from the Singapore Budget measures aided in its net profit growth. It was estimated that Budget measures will yield Parkway S$7m savings in FY09.

Maintain Hold, TP: $1.29. We maintain our Hold recommendation, as we believe the uncertain outlook and uncertainty on the response to Novena medical suites may cap gains in the near term. Our TP is adjusted up slightly to S$1.29 on a higher market value of its PREIT stake.

Parkway - 1Q09 in line, overseas growth profile intact

Parkway reported March 2009 quarter revenues of S$237.8 mn (+4% YoY) and core net profit of S$23.4 mn (+20% YoY), which were in line with consensus and our forecasts, at 24% and 23% of our full-year revenue and earnings estimates, respectively.

The strong double-digit growth in both revenue and EBITDAR at Parkway’s international operations, as well as healthcare services segments, helped mitigate the 9%/14% YoY decline at its Singapore hospitals, on 4% YoY lower inpatient admissions, even as day cases continued to rise, by 9% YoY.

With curative services more resilient to macro uncertainties, we see Parkway’s 32 fixed-fee surgical packages (launched in March 2009), coupled with increase in Medisave withdrawal limits gaining traction among the local patient pool, which could partly offset the decline in foreign patient volumes.

We have kept our earnings forecasts intact for now, and assume that Parkway would likely launch the sale of its Novena hospital medical suites in FY10E. Our SOTP-based target price is S$2.85. We maintain our OUTPERFORM rating.

We noted that investors have become more forward-looking, with heightened expectations. We believe this was due to Parkway's recent good quarterly earnings as well as investors' greater optimism on the group's business model. We have raised our FY09 EPS estimate by 6% to factor in stronger occupancy rates and higher admissions in Malaysia. On the other hand, we have cut FY10-11 forecasts by 7-14% as we scale down on revenue per patient day assumptions for Singapore hospitals. Our sum-of-the-parts target price drops to S$2.00 from S$2.30. Nevertheless, we continue to like Parkway for its strong regional franchise and initiatives to broaden its healthcare revenue base locally and internationally. Maintain Outperform.

Parkway - Removed from MSCI Singapore

Parkway will be removed from the MSCI Singapore index, as part of theindex’s regular review. The change will take effect after market close on 29May.

Fund managers’ portfolio rebalancing in-line with Parkway’s removal fromthe index could result in near-term weakness in Parkway’s share price.Parkway shares closed at S$1.31 today (down S$0.12 or 8.4% fromyesterday’s close) upon news of its removal from MSCI Singapore.

We like Parkway's strong franchise and successful foray into the region butremain cautious on the stock due to funding requirements ($500m and$850m loans due in 2011 and 2013 respectively). Success marketing itsmedical suites will be critical to plug financing needs.

Parkway reports 1Q09 results on Friday, 15 May 2009 and we expect theresults to be in-line with consensus forecasts. Note that sharp earnings cutsby the street over the past few quarters have brought expectations to moremanageable levels.

Parkway: International operations expected to grow

Revenue from Singapore operations lower, but that from International operations higher. Management indicated that for the early part of the year, revenue from its Singapore operations may be lower, attributed to the declining number of visitor arrivals. This decline is likely to be offset by the growth in revenue from its International operations, especially Malaysia. Parkway had expanded the capacity at its Malaysian hospitals and would continue expanding, to meet the growing demand for its services. International operations accounted for 33% of Group revenue in FY08.

Update on the progress of Novena hospital. Piling works are expected to be completed by end Sep 09. The design for the fully single-bedded wards hospital is expected to be completed soon. Construction costs are expected to decline further to about S$400m (initial budget was for S$500m). The Novena hospital is targeted for completion in 2011.

Medical suites to sell for at least S$3,500 psf. The sale of the Novena medical suites will be carried out in phases. Management highlighted that it would prefer to sell its suites for at least S$3,500 psf. While it has not started pre-selling its medical suites, Parkway has received quite a number of enquiries from doctors.

Impact of Medisave liberalisation is minimal. As the only private hospital with a Malaysian arm, Parkway is likely to benefit from the government's recent policy change to allow Medisave to be used for elective treatments overseas. The impact from this policy change is likely to be minimal, as it is usually price-sensitive patients (i.e. these patients are usually not key customers) who would be attracted by it.

We maintain our earnings estimate of S$78.0m for FY09. We have a target price of S$0.92, based on 13x blended forward earnings. Maintain SELL.

Parkway - Healthy franchise at good value

We estimate a value loss of S$279mn from the Novena project. However, we believe this has been priced in. With financing for the project secured, we believe this project will add to Parkway’s franchise value in the longer term.

Parkway remains the dominant private healthcare provider in Singapore and is well-positioned to benefit from the growing demand for private healthcare in Singapore and the region. The group is well-positioned in Malaysia via its 40% interest in Pantai Holdings and has investments in China, India, Brunei and Vietnam. We believe Parkway’s franchise value is built on its track record and strong brand equity, with a scalable business model that allows it to grow its regional footprint via management contracts.

We estimate group gearing will rise to 0.7x by 2011, assuming there is no sale of medical suites. On this conservative scenario, Parkway generates an operating cashflow of S$140mn/year to support this level of gearing.

We derive our price target of S$1.85 based on a sum-of-the-parts valuation, which values the core Singapore operations at S$1.25bn (S$1.08/share). This implies a target P/BV of 1.5x and P/E of 21x, which is below its historical trading average.

Parkway - Sell: Profit Let Down by Exceptional Losses

Maintain Sell — 4Q08 revenue of $241m (+4% yoy) is in line with our ests but several exceptional items resulted in $19.6m loss. However, recurring profit reached $31m and beat our below consensus S$26m est, thanks to a sharp 19% yoy reduction in staff costs which boosted margins. Dividend of 3.2cts for 2008 is much lower than 17.7cts for 2007, reflecting need to preserve capital.

Novena launch — Mgmt reiterated that completion schedule of the Novena suites remains unchanged and targets 80 units for sale for the first tranche. Indicative pricing has not been finalized and banks are financing at 65% LTV.

Hospital segment — Singapore Hospital 4Q08 sales fell 3% yoy but EBITDAR was up 20% to S$33m. However, foreign patient admission started to decline from Nov/Dec 08 onwards and will hurt prospects in 2009. International Hospital revenue rose 16% yoy, driven by Pantai, Cardiac Centre in Brunei and Apollo Gleneagles. A 28% equity interest increase in GHKL in 4Q08 also helped drive Int'l Hospital revenue and profits, with EBITDAR growing by 58%.

Healthcare — Increased patient volume and laboratory usage underpinned Singapore Healthcare 11% yoy sales growth, while International Healthcare was flat (+3%). Overall, Healthcare EBITDAR grew 17% yoy to S$18.4m.

New target price — We raise our earnings ests by 9% over 2009-10E to reflect impact of cost savings (eg. Jobs Credit Scheme); but, recommendation remains unchanged. Our TP is slightly raised to S$1.27, based on 15x 12-mths forward P/E. Our risk rating is changed to High Risk per our Quant Risk rating system.