Random thoughts on RHT Health Trust

I previously wrote a post whereby I included a short list of my so-called ‘dividend stocks’ (see below). I am sure there are many other high yield stocks, and I probably would have missed them out (probably due to my lack of time and resources to do so).

Nevertheless, I do intend to pen down some of my thoughts here as to why I am looking at these stocks.Hope it helps to sort out my thoughts. Of course, my thinking would probably change in the future (depending on how the company and stock prices perform).

Before I continue, I would like to perhaps highlight that this way of thinking could be fundamentally flawed. As I am thinking in terms of what the stock can provide for me first (in terms of dividend), ahead of the company’s fundamental, growth and valuation. Dividend payout is an outcome of earnings, and without continual good earnings, dividend payout is not sustainable.

Let’s see how should I structure my thought processes. I started off this post by looking at the macro (eg. the sectors), the yield vs payout ratio and balance sheet, and consequently wrote about some of my thoughts on RHT Health Trust.

I don’t think I can complete the details of all these stocks in a single post.

1) Sector

I am by nature risk adverse. Basically, when I invest, I tend to think long term. I like defensive sectors and companies that provide things or services that people use on a daily basis. The business itself should be boring and easy to understand.

“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.” Peter Lynch

I don’t really like trading in and out of stocks and prefer to be very off hand once I have bought the stocks.

Healthcare

Consequently, it is no wonder that the first 4 stocks (RHT Health, Parkway Life REIT, First REIT and Vicplas) deal with healthcare.

Ok, Vicplas is not a pure healthcare stock (technically not in the healthcare sector). It operates through two segments, Pipes and Pipe Fittings, and Medical Devices.

I have yet to come across the detailed breakdown of Vicplas revenue. Hence I can’t really gauge what percentage the medical devices section contribute to its overall profit. I also don’t have the complete 10 years financial data of Vicplas (data from Morningstar dates back to only 2009), but my feel so far is that it is a cyclical stock, and base on its short financial historical data, the performance varies widely year on year. On some years, it appears that there was no dividend payout (eg. 2003 to 2009, 2011, 2013, 2014).

Base on the recent 2015 Annual Report, the medical devices section (unfortunately) was loss making (although there was a reduction in its segmental negative results to $2.7 million in FY 2015 from $9.0 million in FY 2014). The pipes and pipe fitting section is the profit making portion than more than compensate for the loss.

For the REITs and Health Trust, the lease for healthcare properties are relatively longer (as compared to offices and retail). RHT’s average lease is 15 years- with the view of renewing for another 15 years.

Ship-building

Next, Yangzhijiang. This is definitely a cyclical business and stock. With reference to my earlier statement, I don’t think it applies (eg. a defensive business). However, ship building is a need. I do not foresee this business going away soon in the future, or disrupted in a major way.

Despite being in a ‘challenging’ industry, Yangzhijiang appears to be a likely candidate to emerge from the collapse of the shipbuilding industry in China and South Korea, stronger. If I am not wrong, the industry has consolidated from 3000 shipbuilding companies (in 2012) to less than 100 companies in China. Yangzhijian is also China’s biggest privately owned shipyard.

Hot stock: Yangzijiang shares galvanised by decent results (read here)

Nevertheless, I think the recent jump in the share price seems too premature. After all, the leap in other income is due to the recognition of advance payment from terminated shipbuilding contracts and lower expenses. There might be further pressure on the stock price downwards in the future.

F&B and Supermarket

E-commerce has a major impact on retail, and to a certain extend F&B. Well, I do see more F&B outlets nowadays as compared to retail spaces. I guess the experiential aspect of dining is still critical – so people still a place to wine and dine. (Of course, Deliveroo, UberEATS, etc could be disruptive to the traditional F&B business). Which is probably why I listed Japan Foods. However, the recent years’ profit (since 2014) has been declining resulting in a decline in dividend payout (despite an increase in payout ratio).

On the other hand, in the case of Old Chang Kee, their business model isn’t that of a full-service restaurant – more finger food, and on the go. They do not require large areas (less rental) and are typically strategically located at busy areas (some near MRT stations). The company seems to be in an expansion mode.

Sheng Siong has also been in an expansion mode ( the only issue is that smaller supermarket players are bidding up the price of the HDB commercial units).

Sheng Siong locks horns with smaller players for HDB sites (read here)

In terms of business model, the sale of daily necessity is a great business. Of course, there are threats from e-commerce (eg. Redmart, Fairprice online). However, there will always be a niche in the local neighborhood for supermarkets.

In terms of growth, in the short list above, Sheng Siong has the highest ROE (~25%). The only other supermarket chain that can beat Sheng Siong’s ROE is Diary Farm (~31%). However, Sheng Siong has a stronger balance sheet (net cash with no debt).

2) Dividend Yield vs Payout Ratio and Balance Sheet

Although, like I said in my previous post, I started out by looking at the yield first… but a high yield which is unsustainable is pointless. One way to ensure that the company is not over-stretched in paying out the dividend is by looking at the payout ratio. Rightfully we should look at the historical payout ratio and see if there is a recent spike in the payout ratio.

Subsequently, I would like a strong balance sheet. Frankly, it is hard finding high dividend yield stocks with good balance sheets (harder to find those in net cash positions).

By default, most of the REITs and Business Trusts would be in net debt positions. REITs’ gearing can go up to 45%. And with the issuance of Perpetual Bonds / Securities, this makes it harder for retail investors to know the actual amount of debt (and the interests due).

So back to the list. The first 3 stocks consist of REITs and Health Trust. And the fourth stock (Vicplas) has a medical device section.

There is a reason why I put them together. Incidentally, Vicplas dividend payout is highly infrequent. So, that leaves us with RHT Health, First REIT and Parkway Life REIT.

After looking at the sector, I will look at their balance sheets. Of the three stocks (RHT Health, First REIT and Parkway Life REIT) – RHT Health Trust has the lowest gearing and the lowest debt / equity ratio.

However, its payout ratio through the years has been consistently more than 100%.

RHT Health Trust‘s portfolio comprises 12 Clinical Establishments, 4 Greenfield Clinical Establishments and 2 Operating Hospitals across India.
ParkwayLife REIT‘s portfolio comprises 49 properties totaling approximately S$1.7 billion, located in Singapore, Japan, and Malaysia (predominantly in Japan).
First REIT‘s portfolio consists of 17 properties across Asia, with a total asset value of S$1.27 billion. These include 13 properties in Indonesia comprising hospitals, an integrated hospital & mall, an integrated hospital & hotel and a hotel & country club, as well as three nursing homes in Singapore and one hospital in South Korea.

In terms of fundamentals, there are many things I like about RHT Health in comparison to First REIT and ParkwayLife REIT:

As mentioned earlier, balance sheet wise, it appears stronger (the gearing and debt/equity ratio are relatively lower).
It also has the highest dividend yield (at 8.7%!).
Growth is good (better than the other 2). ROE at >20%.
Valuation (trailing PE and Price / Book) is low.

Well, 8.7% may seem suspiciously high, but considering that the India 10 year Government Bond yields 6.9%, 8.7% yield is alright (relatively ok).

However, as with most REITs and Trusts, there are a lot of loopholes when I think about the sustainability of the dividend payout:

RHT Health Trust was only listed on SGX mainboard not too long ago on September 25^th 2012. Hence, base on the table above, there is only a short history of the dividend payout… It is really hard to gauge the longevity of its payout base on the short history (as a listed company).
With the disposal of 51% of the compulsory convertible debentures (CCDs) in Fortis Hospotel and the impact demonetization in India, the DPU will be under pressure (both long and short term).
In addition, with such a high payout ratio (more than 100%), the sustainability of the high yield is questionable.
Consequently, unlike First REIT & ParkwayLife REIT, RHT Trust is subject to forex risks as its income is in Indian rupee.

More importantly, there are a few questions which I felt are unanswered:

a) There are a number of development projects as stated in its recent 3rd quarter financial results:

Ludhiana Greenfield Clinical Establishment to be completed by April 2017,

BG Road Brownfield Clinical Establishment to be completed by April 2017,

Expansion of Mohali Clinical Establishment to be completed by March 2020,

Jaipur Clinical Establishment to be completed by April 2017,

Mulund Clinical Establishment to be completed by March 2018,

Nagarbhavi Clinical Establishment to be completed by March 2018,

Amritsar Clinical Establishment to be completed by March 2018,

Noida Clinical Establishment to be completed by March 2018,

Shalimar Bagh Clinical Establishment to be completed by Sept 2017.

Of these, there are 4 Greenfield Clinical Establishments (Total development costs are estimated at SGD 66 mil).

Where is the construction cost coming from? Private placement – resulting in the dilution of dividend payout? Perpetual Bonds? More loans (after all, the gearing has more headroom to ‘grow’)? I have no idea? Will the relatively low gearing change overnight?

Just out of curiosity. The dividend payout for 2015 was S$0.0761 per share (Total yield was 8.7%), while dividend payout for 2014 was S$0.0775 (Total yield was 8.86%). It did consider the dividend payout for 2016 as the yield during that year was just too high 36.82% (probably due to a one-off sale of the asset).

Total share outstanding now stands at 799.59 mils. So the ballpark figure of the total amount of dividend payout is approx. S$62 mil. That is just around S$4 mil below the construction cost. And payout ratio is already more than 100%… The impact of construction cost is a big question mark.

Why would a company give out dividend money to investors and take on more loan to pay for construction?

b) It was always stated that healthcare need in India is great and RHT is well positioned to take advantage of it. That may be true, but I have read that there also many other healthcare clinics and hospitals located near to RHT’s clinical establishments.

A huge market doesn’t mean there is no intense competition (perhaps more so – given all the hype about the huge India market). How is RHT going to compete with so many competitors like Vijaya Hospital; Apollo Hospital, Manipal Hospitals and to a lesser extent, government-owned hospital, smaller private hospital groups, and new entrants?

In RHT’s recent third-quarter earnings report, the occupancy rate of RHT Health Trust’s portfolio came in at only 75% in the reporting quarter.

In comparison, in the case of First REIT as at 31 December 2016 (as stated in First REIT website), the reported occupancy is at 100%. For the case of ParkwayLife REIT, the committed occupancy as at 24 February 2017, is at 99.96%.

Incidentally, in the case of First REIT, the predominant tenant is its sponsor, PT Lippo Karawaci Tbk .

Am I missing something here? Given the huge market in India (middle class and upper class), and with RHT’s ‘award winning’ hospitals and quality assets (see below)- it only managed 75% occupancy?

And when I checked back in the 3rd quarter financial results report, since 3 quarter FY 2014, the occupancy rate for RHT has always been hovering about 72% to 84%. Mostly below 80%. (See below)

Nevertheless, RHT is a stock worth looking into…. still on the list. Oh yeah, this is not a recommendation to buy. Just some random thoughts from a blogger.