Primary Health Properties PLC: Update
SummaryEdit
- 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, continue to note that the degree of risk associated with an investment in Primary Health Properties is relatively low and remain of the view that the valuation of the company is attractive.
Succession PlanningEdit
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. The company previously indicated that Mr. Hyman will step down around that time, so the announcement is in-line with the market expectations.
FinancialsEdit
In light of the announcements, we have maintained our forecasts, which can be found by clicking here.
RisksEdit
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. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.
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.
ValuationEdit
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/most 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?Edit
Accordingly, we estimate that the expected return of an investment in Primary Health Properties Plc over the next 12-months is 59%. In other words, an £100,000 investment in the company is expected to return £159,000 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 59%), then an investment in the company is considered to be a 'suitable' one.
What are the assumptions used to estimate the return figure?Edit
| 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. Over the last 10 years, the median dividend growth rate of the company is 2.78% and the mean is 3.47%. |
| 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. The calculation of the required return on equity (and the reasons behind the calculation) can be found in the table below. |
| 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. 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. |
| Equity risk premium (%) | 6.00 | 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 (%) | 6.74% | Cost of equity = Risk-free rate + Beta x Equity risk premium. |
Sensitive analysisEdit
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 6.74%);
- The dividend growth rate (the default multiple is 2.78%); 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% |
AppendixEdit
PeersEdit
| 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% |
Other informationEdit
Key things about the investment case of the company:
- Dividend growth every year since inception (i.e. for 26 years).
- 89% of rents are covered by government national health bodies of the UK and Ireland, supporting 99.7% occupancy rates and minimal tenant defaults or similar unplanned costs.
- The lowest cost ratio (costs / rental income) in the whole of the UK REIT (real estate investment trust) space, with a EPRA (European Real Estate Association) cost ratio at 10.5%.
- 95% of group debt is hedged for almost eight years.
- A quarter of rent roll is explicitly linked to inflation, and management argues that the balance is effectively linked to inflation through replacement cost.
- Headroom to continue growing the portfolio of health centres.
- An improving rental growth outlook, with rent reviews and asset management projects completed in the first half of this year adding £1.8m or 1.3% on a like-for-like basis.
Valuation
The stock trades on 22.4x our FY22 earning forecast, which falls to 21.8x in FY23. On our forecasts, the dividend yields 4.5% this year, rising to 4.6% next year. We believe the valuation is attractive, given the strong track record, low operational risk profile and attractive business drivers.
DividendsEdit
Over the last 10 years, the median dividend of the company is 2.78% and the mean is 3.47%.
| Year | Q1 | Q2 | Q3 | Q4 | Total | Growth (%) |
|---|---|---|---|---|---|---|
| 2022 | 1.625 | 1.625 | 1.625 | 1.625 | 6.5 | 4.84% |
| 2021 | 1.55 | 1.55 | 1.55 | 1.55 | 6.2 | 5.08% |
| 2020 | 1.475 | 1.475 | 1.475 | 1.475 | 5.9 | 5.36% |
| 2019 | 1.4 | 1.4 | 1.4 | 1.4 | 5.6 | 3.70% |
| 2018 | 1.35 | 1.35 | 1.35 | 1.35 | 5.4 | 2.86% |
| 2017 | 1.31 | 1.31 | 1.31 | 1.32 | 5.25 | 2.44% |
| 2016 | 1.28125 | 1.28125 | 1.28125 | 1.28125 | 5.125 | 2.50% |
| 2015 | 0 | 2.5 | 0 | 2.5 | 5 | 2.56% |
| 2014 | 0 | 2.4375 | 0 | 2.4375 | 4.875 | 2.63% |
| 2013 | 0 | 2.375 | 0 | 2.375 | 4.75 | 2.70% |
| 2012 | 0 | 2.3125 | 0 | 2.3125 | 4.625 |