MedicX Fund
MedicX Fund |
More Irish expansion |
Q3 NAV update |
Real estate |
11 August 2016 |
Share price performance
Business description
Next event
Analysts
MedicX Fund is a research client of Edison Investment Research Limited |
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Continuing yield compression generated additional valuation gains in Q3, while selective acquisitions continue at MedicX. The EU referendum result has no impact on the fundamental drivers of primary care and we doubt that the political will to deliver healthcare reforms will be dented. As a long-term investor in a broad portfolio of modern primary care properties, MedicX Fund has very secure, long-term cash flows to support the c 6.7% progressive dividend yield, while portfolio growth is increasing dividend cover. Lease duration is long and quasi-government backed, while debt is of similar duration with the cost fixed (gearing of 52.3% at 31 March 2016).
Year |
Revenue (£m) |
PBT* |
EPS* |
DPS |
EPRA NAV/ |
Yield |
DCF/share** |
09/14 |
29.5 |
10.7 |
3.1 |
5.80 |
65.4 |
6.6 |
93.4 |
09/15 |
33.7 |
13.5 |
3.7 |
5.90 |
70.8 |
6.7 |
94.9 |
09/16e |
35.9 |
13.6 |
3.6 |
5.95 |
71.9 |
6.7 |
95.6 |
09/17e |
39.9 |
14.8 |
3.9 |
6.00 |
72.3 |
6.8 |
- |
Note: *PBT and EPS are normalised, excluding asset revaluations, performance fees and exceptional items. **Investment adviser’s DCF value/share. 09/16e DCF value is as last reported at 30 June 2016.
Portfolio growth and valuation gain in Q316
A further contraction in UK valuation yields during the quarter (to 5.28% at 30 June from 5.36% at the end of March) contributed to a net valuation gain of £7.4m. The unaudited EPRA NAV was £275.1m at the end of the period, or 72.8p per share, up from 71.2p at 31 March and after 1.4875p of dividends. The investment pipeline is strong and selective investment continues, but at a slower pace in the quarter than we had allowed for, leading us to defer some expected investment to FY17. We have slightly increased our NAV estimate as a result of valuation gains and slightly delayed revenue growth as a result of the investment deferral (see Exhibit 1).
Secure income and growth
The underlying drivers of primary care property demand in both the UK and the Republic of Ireland (RoI) are a combination of demographics, medical advances, the need to upgrade the existing estate and the importance of generating efficiencies in the overall provision of healthcare (for a detailed explanation see our note of 7 June). With broad political consensus for NHS planning, we see no impact from the Brexit vote. NHS planning should lead to an acceleration of new development opportunities in the UK, while investment in RoI offers attractive additional rental yield premium, with no material tenant covenant weakening.
Valuation: Secure cash flows support premium to NAV
The security of income that results from long leases and effective full occupancy with strong tenant covenants has been recognised by the market since the EU referendum, with a 7% rise in the share price amid a generally weak broad commercial real estate sector. The price to NAV has increased to 1.24x, but the yield remains highly attractive at 6.7% and we forecast dividend cover to be on an improving trend in FY17 (to c 65%) as assets under construction in RoI complete.
Continued asset growth and changes to forecasts
MedicX has issued its quarterly NAV update for the nine months ended 30 June 2016. The unaudited EPRA NAV at that date was £275.1m or 72.8p per share compared with £267.2m (71.2p per share) at 31 March 2016. As expected, a quarterly dividend of 1.4875p per share was paid at the end of the quarter.
Investor appetite for existing let properties has remained strong, alongside solid market fundamentals. A shortage of available modern properties and a continuing slow pace of new development approvals have seen yields fall further during the quarter. The quarterly external valuation of MedicX’s UK portfolio at 30 June 2016, on the basis that all properties were complete, reflects a net initial yield of 5.28%, down from 5.36% at 31 March. This represents a 1.25% uplift on a like-for-like basis or a net valuation gain of £7.4m. We have adjusted our forecasts for this gain but, as usual, make no assumption about future yield movements, allowing only for the valuation impact of assumed rent growth.
During the first six months of the current financial year (to 31 March), MedicX committed £27.4m to investment in new properties, including the acquisition of six completed and let UK properties, and agreed to forward-fund two other properties, one in the UK and one in RoI. Given the competition for assets and changing primary care environment, MedicX has indicated a selective approach to investment opportunities, with a focus on sustainable, modern, purpose-built development assets in both the UK (where a gradual increase in NHS approvals is expected) and the RoI. There is currently a strong pipeline of c £95m of assets either in solicitors’ hands or under negotiation (a narrower, more immediate definition of the opportunity than the £144m quoted at the interim stage). There were no new commitments in the most recent quarter, but in July MedicX committed €8.6m to fund a Primary Care Centre (PCC), its third Irish investment. The portfolio now comprises 152 properties of which seven are under construction, of which six were due to be finished within a year. The annualised rent roll for all the properties is now £37.1m.
After the first half we were forecasting H216 commitments of £33m: £10m in completed UK assets, £10m of development in the UK and £13m of development assets in Ireland. Despite the robust pipeline, we now think it is prudent to reduce this to £23m of commitments in H216, deferring £5m of the reduction to FY17, where our forecast commitments increase from £75m to £80m. We have focused the H216 commitment reduction on completed assets where pricing is particularly competitive, taking this to nil in H216, but increasing it by an additional £5m (to £20m) in FY17.
Following the EU referendum, the broad commercial real estate market has been volatile due to increased uncertainty, and transaction activity has slowed. This appears not to have been the case for transactions in primary care real estate, with management and valuers reporting continued activity with no change in market sentiment and no adverse effect on valuations.
Exhibit 1 summarises the small changes to our estimates. The changes to our investment commitment assumptions have a slight negative effect on revenue, while the yield-driven valuation gain increases EPRA NAV.
Exhibit 1: Estimate changes
Revenue (£m) |
PBT (£m) |
EPS (p) |
EPRA NAV/share (p) |
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Old |
New |
% change |
Old |
New |
% change |
Old |
New |
% change |
Old |
New |
% change |
|
09/16e |
36.1 |
35.9 |
(0.5) |
13.8 |
13.6 |
(1.2) |
3.7 |
3.6 |
(1.2) |
71.1 |
71.9 |
2.0 |
09/17e |
40.4 |
39.9 |
(1.1) |
15.2 |
14.8 |
(2.7) |
4.0 |
3.9 |
(2.7) |
71.7 |
72.3 |
1.9 |
Source: Edison Investment Research
Exhibit 2: Financial summary
Year end 30 September |
£'000s |
2013 |
2014 |
2015 |
2016e |
2017e |
|
PROFIT & LOSS |
|||||||
Revenue |
|
|
25,537 |
29,488 |
33,669 |
35,916 |
39,946 |
Cost of Sales |
(413) |
(666) |
(902) |
(952) |
(980) |
||
Gross Profit |
25,124 |
28,822 |
32,767 |
34,964 |
38,966 |
||
EBITDA |
|
|
20,616 |
23,664 |
27,255 |
29,080 |
33,099 |
Operating Profit (before GW and except.) |
|
|
20,616 |
23,664 |
27,255 |
29,080 |
33,099 |
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
||
Revaluation of investment properties |
248 |
11,649 |
25,603 |
13,219 |
9,467 |
||
Performance fee / gains or losses on disposal |
(240) |
(1,888) |
0 |
31 |
0 |
||
Operating Profit |
20,624 |
33,425 |
52,858 |
42,330 |
42,566 |
||
Net Interest |
(10,959) |
(12,989) |
(13,736) |
(15,439) |
(18,341) |
||
Profit Before Tax (norm) |
|
|
9,657 |
10,675 |
13,519 |
13,641 |
14,759 |
Profit Before Tax (FRS 3) |
|
|
9,665 |
20,436 |
39,122 |
26,891 |
24,226 |
Deferred tax on fair value movements in property values |
(299) |
(264) |
(3,293) |
(151) |
0 |
||
Profit After Tax (norm) |
9,656 |
10,675 |
13,520 |
13,643 |
14,762 |
||
Profit After Tax (FRS 3) |
9,366 |
20,172 |
35,829 |
26,740 |
24,226 |
||
Average Number of Shares Outstanding (m) |
263.4 |
341.4 |
361.3 |
376.2 |
382.0 |
||
EPS - normalised (p) |
|
|
3.7 |
3.1 |
3.7 |
3.6 |
3.9 |
EPS - FRS 3 (p) |
|
|
3.6 |
5.9 |
9.9 |
7.1 |
6.3 |
Dividend per share (p) |
5.70 |
5.80 |
5.90 |
5.95 |
6.00 |
||
Dividend cover |
63.8% |
53.6% |
63.3% |
61.5% |
64.5% |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
426,649 |
502,906 |
553,479 |
618,175 |
712,422 |
Intangible Assets |
0 |
0 |
0 |
0 |
0 |
||
Tangible Assets |
399,502 |
492,252 |
544,490 |
607,269 |
697,422 |
||
Properties under construction |
27,147 |
10,654 |
8,989 |
10,906 |
15,000 |
||
Current Assets |
|
|
38,067 |
39,306 |
63,688 |
37,210 |
38,169 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
11,004 |
8,181 |
6,778 |
7,209 |
8,167 |
||
Cash |
27,063 |
31,125 |
56,910 |
30,000 |
30,000 |
||
Current Liabilities |
|
|
(19,994) |
(56,714) |
(20,862) |
(18,022) |
(20,416) |
Creditors |
(18,865) |
(23,866) |
(18,966) |
(18,022) |
(20,416) |
||
Short term borrowings |
(1,129) |
(32,822) |
(1,896) |
0 |
0 |
||
Financial derivatives |
0 |
(26) |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(273,732) |
(254,798) |
(342,208) |
(367,529) |
(457,836) |
Long term borrowings |
(272,615) |
(253,485) |
(336,412) |
(361,599) |
(451,906) |
||
Other long term liabilities |
(1,117) |
(1,313) |
(5,796) |
(5,930) |
(5,930) |
||
Net Assets |
|
|
170,990 |
230,700 |
254,097 |
269,835 |
272,339 |
Net Assets excluding goodwill and deferred tax |
|
|
171,832 |
231,764 |
258,428 |
274,316 |
276,819 |
NAV/share (p) |
62.2 |
65.1 |
69.6 |
70.7 |
71.2 |
||
EPRA NAV/share (p) |
62.5 |
65.4 |
70.8 |
71.9 |
72.3 |
||
Est. value/share of Fund's long-term fixed rate debt (p) |
6.3 |
-0.4 |
-6.9 |
-9.5 |
-9.5 |
||
EPRA NNAV/share including benefit of long-term debt (p) |
68.5 |
64.7 |
62.7 |
61.2 |
61.7 |
||
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
18,515 |
23,639 |
23,362 |
27,325 |
34,536 |
Net Interest |
(11,495) |
(11,342) |
(13,210) |
(15,288) |
(18,341) |
||
Tax |
0 |
0 |
0 |
0 |
0 |
||
Capex |
0 |
0 |
0 |
0 |
0 |
||
Acquisitions/disposals |
(30,428) |
(42,161) |
(23,316) |
(51,022) |
(84,780) |
||
Financing |
(1,757) |
55,577 |
6,119 |
10,349 |
0 |
||
Dividends |
(13,610) |
(16,759) |
(19,247) |
(21,552) |
(21,722) |
||
Net Cash Flow |
(38,775) |
8,954 |
(26,292) |
(50,189) |
(90,307) |
||
Opening net debt/(cash) |
|
|
189,206 |
246,681 |
255,182 |
281,398 |
331,599 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
||
Other items (including debt assumed on acquisition) |
(18,700) |
(17,455) |
76 |
(12) |
0 |
||
Closing net debt/(cash) |
|
|
246,681 |
255,182 |
281,398 |
331,599 |
421,906 |
Source: Company accounts, Edison Investment Research
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