Summary
- Primary Health Properties, the FTSE 250 healthcare real estate investment company, has announced that Harry Hyman will officially step down as the company's chief executive officer (CEO) at the company's 2024 annual general meeting (AGM), which we estimate will take place between 1st April 2024 and 11th June 2024.
- The company previously indicated that Mr. Hyman will step down around that time, so the announcement is in-line with the market expectations.
- Accordingly, we have maintained our forecasts, and estimate that the expected return of an investment in Primary Health Properties over the next 12-months is ccc%. In other words, an £100,000 investment in the company is expected to return £ccc in 12-months time.
- We note that the degree of risk associated with an investment in Primary Health Properties is relatively 'low', with the company's shares having an adjusted beta[1] that is 47% below the market (0.531 vs. 1).
- All-in-all, assuming that a suitable return level in the next 12 months is 10% or more, then an investment in the company is considered to be a 'suitable' one.
Succession Planning
On 12th December 2022, the company announced that Harry Hyman will officially step down as the company's chief executive officer (CEO) at the company's 2024 annual general meeting (AGM), which, based on the dates of the company's last five AGMs, we estimate will take place between 1st April 2024 and 11th June 2024, and on a Wednesday.
The company previously indicated that Mr. Hyman will step down around that time, so the announcement is in-line with the market expectations.
The search for the next CEO is being led by the company's chairman and non-executive director Steven Owen. To help maintain the independence of a non-executive director position, the position is normally served by someone for a maximum nine years. For Mr. Owen, the nine years will elapse in January 2023; however, to ensure a smooth transition of the CEO position, he will remain as the chairman until the new CEO appointment, subject to shareholder approval. Also, he will remain a member of the Nomination Committee and ESG Committee until the appointment, and cease to be a member of the Remuneration Committee from 31st December 2022.
| # | Date | Day of the week |
|---|---|---|
| 1 | 27th April 2022 | Wednesday |
| 2 | 12th May 2021 | Wednesday |
| 3 | 1st April 2020 | Wednesday |
| 4 | 11th June 2019 | Tuesday |
| 5 | 18th April 2018 | Wednesday |
Financials
In light of the announcements, we have maintained our forecasts, which can be found by clicking here.
Risks
As with any investment, investing in Primary Health Properties carries a level of risk. Overall, based on the company's market beta (i.e. 0.531), the degree of risk associated with an investment in Primary Health Properties is relatively 'low'. Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice.
For us, currently, the biggest risk to the valuation of the company relates to macro-economic factors, in particular unexpected and sudden changes in inflation and interest rates movements.
Valuation
Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more accurate is the absolute valuation approach, so that's the approach that we suggest using to determine the estimated value of the company.
What's the expected return of an investment in Primary Health Properties using the absolute valuation approach?
Accordingly, we estimate that the expected return of an investment in Primary Health Properties Plc over the next 12-months is ccc%. In other words, an £100,000 investment in the company is expected to return £ccc in 12-months from now. The assumptions used to estimate the return figure can be found in the table below.
Assuming that a suitable return level in the 12 months is 10% and Primary Health Properties Plc achieves its expected return level (of ccc%), then an investment in the company is considered to be a 'suitable' one.
What are the assumptions used to estimate the return figure?
| Description | Value | Commentary |
|---|---|---|
| Which valuation model do you want to use? | Discounted cash flow | A discounted cash flow model (also known as present value model) applied to equity valuation derives the value of common stock as the present or discounted value of its expected future cash flows (in private business appraisal, such models are known as income models of valuation). |
| Which type of 'discounted cash flow model' do you want to use? | Dividend discount model | For common stock, one familiar type of cash flow is dividends, which are discretionary distributions to shareholders authorized by a corporation’s board of directors. Dividends represent cash flows at the shareholder level in the sense that they are paid directly to shareholders. Present value models based on dividends are called dividend discount models. |
| For the 'dividend discount model', which approach do you want to use? | Forecast future dividends, by assigning the stream of future dividends to one of several stylized growth patterns | |
| For forecasting future dividends by assigning the stream of future dividends to one of several stylized growth patterns, how many distinct stage of growth do you want to use? | One stage | For simplicity, we have used the one stage pattern here. |
| For forecasting future dividends by assigning the stream of future dividends to one stage of growth, what is the expected constant growth rate in dividends? | 3% | |
| For forecasting future dividends by assigning the stream of future dividends to one stage of growth, what is the one-year forward expected dividend amount? | Proactive Investors | |
| For forecasting future dividends by assigning the stream of future dividends to one stage of growth, what is the required return on equity? | 7% | |
| Which financial forecasts to use? | Proactive Investors | |
| Which type of multiple do you want to use? | P/FFO | The FFO does not account for depreciation in properties but rather adds back the depreciation value back to the net income. Furthmore, FFO deducts any gains or losses from the sale of assets, since including the transaction would result in discrepancies in the revenues reported in each period. Accordingly, we suggest valuing the company using the Price to Funds From Operations (P/FFO) ratio. |
| In regards to the P/FFO multiple, for the FFO figure, which year to you want to use? | Twelve months ahead | Research suggests that when using the relative valuation approach, it's best to use a time period of 12 months or less. Accordingly, for the FFO figure, we suggest using the twelve months ahead. |
| In regards to the P/FFO multiple, what multiple figure do you want to use? | 18x | According to Bloomberg, Primary Health Properties Plc closest peers trade on a multiple of 18x. |
| Which financial forecasts to use? | Proactive Investors | Here, we have used the forecasts of Proactive Investors. |
| What's the current value of the company? | £981.20 million | As at 22nd November 2022, the current value of Primary Health Properties Plc is £981.20 million. |
| Which time period do you want to use to estimate the expected return? | Between now and one year time | Research suggests that when using the relative valuation approach, it's best to estimate the expected return of the company between now and one year time. |
The three main inputs that result in the greatest change in the expected return of the Primary Health Properties Plc investment are, in order of importance (from highest to lowest):
- The discount rate (the default multiple is 7%);
- The dividend growth rate (the default multiple is 3%); and
- The dividend per share forecast (the default forecast is 6.69 pence per share).
The impact of a 20% change in those main inputs to the expected return of the Primary Health Properties Plc investment is shown in the table below.
| Main input | 20% worse | Unchanged | 20% better |
|---|---|---|---|
| Discount rate | 43% | 57% | 73% |
| Growth rate | |||
| Dividend per share | 43% | 57% | 73% |
Appendix
What are the assumptions used to estimate the return figure?
| Description | Value | Commentary |
|---|---|---|
| Which type of multiple do you want to use? | P/FFO | The FFO does not account for depreciation in properties but rather adds back the depreciation value back to the net income. Furthmore, FFO deducts any gains or losses from the sale of assets, since including the transaction would result in discrepancies in the revenues reported in each period. Accordingly, we suggest valuing the company using the Price to Funds From Operations (P/FFO) ratio. |
| In regards to the P/FFO multiple, for the FFO figure, which year to you want to use? | Twelve months ahead | Research suggests that when using the relative valuation approach, it's best to use a time period of 12 months or less. Accordingly, for the FFO figure, we suggest using the twelve months ahead. |
| In regards to the P/FFO multiple, what multiple figure do you want to use? | 18x | According to Bloomberg, Primary Health Properties Plc closest peers trade on a multiple of 18x. |
| Which financial forecasts to use? | Proactive Investors | Here, we have used the forecasts of Proactive Investors. |
| What's the current value of the company? | £981.20 million | As at 22nd November 2022, the current value of Primary Health Properties Plc is £981.20 million. |
| Which time period do you want to use to estimate the expected return? | Between now and one year time | Research suggests that when using the relative valuation approach, it's best to estimate the expected return of the company between now and one year time. |
Health Care REIT
| Company name | Bloomberg ticker | Primary exchange | Market capitalisation (GBP) | BF P/FFO | Yield (%) | Interest cover (x) | Total debt/total capital |
|---|---|---|---|---|---|---|---|
| Primary Health Properties PLC | PHP LN | 1,459m | 0.168 | 5.95% | N/A | 46% | |
| Assura PLC | AGR LN | 1,578m | -- | 5.77% | 3.77 | 41% | |
| Aedifica SA | AED BB | 2,660m | 14.8279 | 4.75% | 5.91 | 43% | |
| Target Healthcare REIT PLC | THRL LN | 477m | -- | 8.78% | 8.35 | 25% | |
| Cofinimmo SA | COFB BB | 2,340m | 11.3873 | 7.12% | 7.80 | 44% | |
| Impact Healthcare Reit PLC | IHR LN | 404m | 0.1111 | 6.51% | N/A | 22% |
Sensitive analysis
The two main inputs that result in the greatest change in the expected return of the Primary Health Properties Plc investment are, in order of importance (from highest to lowest):
- The P/FFO multiple (the default multiple is 18x); and
- The twelve months ahead FFO forecast (the default forecast is €98.78 million).
The impact of a 10% change in those main inputs to the expected return of the Primary Health Properties Plc investment is shown in the table below.
| Main input | 10% worse | Unchanged | 10% better |
|---|---|---|---|
| The P/FFO multiple | 43% | 57% | 73% |
| The twelve months ahead FFO forecast | 43% | 57% | 73% |
healthcare properties in the UK and Ireland.
| Input | Input value | Additional information |
|---|---|---|
| Risk-free rate (%) | 3.55% | Here, the risk free rate is the US 30 year treasury bond, and is calculated as at 12th December 2022. |
| Beta | 0.531 | |
| Equity risk premium (%) | 5.26 | Here, the equity risk premium is in relation to the global region, and is calculated as at 1st January 2022 (https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html). |
| Cost of equity (%) | 6.34% | Cost of equity = Risk-free rate + Beta x Equity risk premium. |
References and notes
- ↑ Research shows that an investment has two main types of risks: 1) non-systematic and 2) systematic. Systematic risk is the risk related to the overall market, and non-systematic risk is the risk that's specific to an individual investment. Evidence shows that taking on non-systematic risk is inefficient, and it's, therefore, best to eliminate it; and in most cases, elimination is fairy easy to do [by holding a diversified portfolio of investments (i.e. around 15 investments)]. Accordingly, when assessing the riskiness of an investment, it’s best to look at the systematic risk only (i.e. ignore the non-systematic risk). A key measure of systematic risk is beta, and a main way to determine the riskiness of an investment is to compare the beta of the investment with the beta of the market, which is 1. For example, Sirius's adjusted beta (5 years, monthly data) is 1.06, and is, accordingly, 6% above the market beta (of 1); assuming that a 'low' level of riskiness is 10% or less above the market beta, then the riskiness of investing in the company is considered to be relatively 'low' (1.6%<10%). For estimating an asset's beta, in terms of time period, and frequency of observations, the most common choice is five years of monthly data, yielding 60 observations. In terms of the benchmark, we suggest using the iShares MSCI World ETF. One study of U.S. stocks found support for five years of monthly data over alternatives. The beta value in a future period has been found to be on average closer to the mean value of 1.0, the beta of an average-systematic-risk security, than to the value of the raw beta. Because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.