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 | 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. |
| Which type of discounted cash flow model do you want to use? | Dividend discount model | The dividend discount model (DDM) is one of the most common discounted cash flow models. |
| How many distinct stage of growth do you want to use? | One stage | For simplicity, we have used the one stage pattern here. |
| What is the expected constant growth rate in dividends? | 3% | We note that the gross domestic product (GDP) growth rate in the last 20 years (2001 to 2022) is around 3% per year for the global economy, and around 2.25% for the United Kingdom. We expect the growth rate to be much higher that the global economy growth rate, but being conservative, we have assumed the 3%. |
| Which forecasts to use for the one-year ahead expected dividend amount? | Proactive Investors | Here, we have used the forecasts of Proactive Investors. |
| What is the required return on equity? | 7% | For estimating the required return on equity, we used the Capital Asset Pricing Model (CAPM), which provides an economically grounded and relatively objective procedure for required return estimation, and, therefore, it has been widely used in valuation. |
| What's the current value of the company? | 108.9 pence per share | As at 12th December 2022, the current value of Primary Health Properties Plc is 108.9p per share. |
| 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 | 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. |
| 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. |
Sensitive analysis
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 30% 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 | 4% | 58% | 233% |
| Dividend per share | 11% | 58% | 106% |
| Growth rate | 28% | 58% | 106% |
Appendix
| 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 | United Kingdom | 1,459m | 0.168 | 5.95% | N/A | 46% |
| Assura PLC | AGR LN | United Kingdom | 1,578m | -- | 5.77% | 3.77 | 41% |
| Aedifica SA | AED BB | Belgium | 2,660m | 14.8279 | 4.75% | 5.91 | 43% |
| Target Healthcare REIT PLC | THRL LN | United Kingdom | 477m | -- | 8.78% | 8.35 | 25% |
| Cofinimmo SA | COFB BB | Belgium | 2,340m | 11.3873 | 7.12% | 7.80 | 44% |
| Impact Healthcare Reit PLC | IHR LN | United Kingdom | 404m | 0.1111 | 6.51% | N/A | 22% |
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, Primary Health Properties' adjusted beta (5 years, monthly data) is 0.531, and is, accordingly, 47% below 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' (-47%<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.