Investment Analysis of Religare Health Trust [RF1U]

***Please note that this does not constitute a stock recommendation for buy or sell. This is purely my own analysis and is to be taken as my own personal opinion and not to be taken as correct. Kindly do your own diligence in purchasing stocks.

This is an analysis of Religare Health Trust [RF1U], a business trust listed on SGX which consists of healthcare assets in India. I have recently initiated a long position in it and I plan to hold it for the long run.

religare logo comparison

Doesn’t the logo look like a green inverted tilted DBS?

It has a short listing history, only listed on SGX since 2012, and it has an investment mandate to principally to invest in medical and healthcare assets and services in Asia, Australasia and emerging markets in the rest of the world. RHT may also develop medical and healthcare assets. (Although for now, it seems like it is only developing its assets in India.) Currently it has 18 assets spread across India, 12 clinical establishments, 4 green-field clinical establishments, and 2 operating hospitals. Clinical Establishment refers to a fully centrally air-conditioned institution established and specifically customized and fitted with all fixtures, fittings, medical equipment and infrastructure required for running and operating a hospital, offering: (1) services for diagnosis and treatment for illness, disease, injury, deformity and/ or abnormality; (2) diagnosis of diseases through radiological and other diagnostic and investigative services with the aid or laboratory or other medical equipment; and (3) beds for in-patient treatment. The Greenfield clinical establishments mean that the investment is in an area where no previous facilities exist, and the Group is able to build according to its own specifications.

So where does its’ revenue come from? This is the part where it gets a bit tricky and I am slightly unsure and might be wrong. Its’ revenue is divided into 3 portions – Service fee, Hospital income and Other income.

Service fee: Aggregate of the base and variable service fee for providing Clinical Establishment services, including but not limited to the out-patient department services (OPD) and the radio diagnostic services (RDS). Based fee is an amount agreed upon with Fortis group and increases 3% p.a. revised upwards for capex/expansions and variable fee is 7.5% of the Fortis Hospital’s operating income. Sounds good on paper that it is able to participate in the operational growth of the Fortis hospitals.

Hospital income: Solely arises from the provision of medical services of the 2 operating hospitals under RHT.

Other income: Includes lease income from pharmacy, cafeteria, bookshop, automated teller machines and other amenities in the Clinical Establishments of the Group

This is slightly confusing as if I understand correctly from the prospectus, the hospital service companies will hold all of the RHT clinical establishments in the initial portfolio, and will enter hospital and medical services agreements with Fortis entities, which will manage and run the operations of those establishments and provide additional healthcare above those provided by the hospital service companies such as in-patient and emergency services. Sounds a bit odd to me, but I am definitely unfamiliar with the way how this works.


Anyways, diving straight into my own estimated calculations, using the Gordon Dividend growth Model, assuming no growth rate and constant capital structure, the back of the envelope computes the share price to be approximately $1.02.

Shareholder equity (S) – 739,608

Debt (D) – 269,795

Cost of equity – 7.0% [assumed as the yield rate that the Group’s investors seek, which can also be taken as yield investor is seeking, and actually the yield rate I am looking at]

**Note that cost of equity above is different from distribution payout amount below, (cost of equity may vary, depending on the entry price)

FY2012 – $0.0355 (half year data available due to listing in Oct 2012)

FY2013 – $0.0405+$0.0414 = $0.0819

FY2014 – $0.0361+$0.0371=$0.0732

FY2015 – $0.039+$0.0382=$0.0772

Cost of debt – 6.5% [conservative estimate, with 4.5% fixed rate note from multicurrency MTN]

WACC – 7.31% [(S/(S+D)*(Cost of equity) + D/(S+D)*(Cost of debt)]

Valuation – $1.026 [(Cost of equity)/(WACC), Assuming no dividend growth]

For this share, I bought it at a fair price of $1.01, which is different from other shares which I buy them undervalued instead. Going by its NAV of $0.927, it is currently trading at a premium of approximately 8.95%. It also have a lot of room for expansion/acquisition via debt, with its current gearing ratio at 18.1%, and management is voluntarily adopting a gearing limit of 60%, with a target policy of 30-40%. Currently it has a distribution policy of distributing 95% of distributable income for FY2017, and have 5% retained for future capital expenditure in relation to expansion or replacement initiatives.


So why was I attracted to this? It’s for the reasons below:

Growth of Healthcare

Healthcare is always necessary and the demand for it will only rise over time. It has blossomed well in Singapore, with healthcare becoming more expensive over time (just look at the share price of medical related companies), and India being an emerging company, there will be plenty of opportunities for it to grow and develop. People are also getting more affluent in India, which results in an increase in lifestyle related diseases for the Indian locals and a growing medical tourism industry will only increase the demands for the healthcare sector. This is also receiving a boost from the government, whereby government encourages industry players to provide quality healthcare through public-private partnerships, tax incentives, and subsidies, and promoting health insurance market to make private healthcare more affordable. Moreover, Religare has a very strong sponsor, Fortis, and have rights of first refusal over the clinical establishments it own, allowing Religare opportunities for expansion of assets. Also, despite the premium over the NAV, it does not seem to earn rental fee of the hospital establishment, but rather providing medical services. Comparing to other players in the similar industry, healthcare REITs also tend to command a premium over NAV as well.

Business trust structure and distribution policy

I have been looking for an investment with constant recurring income and I guess a business trust structure fits the bill. Singaporeans in general prefer REITs, and especially with the current downturn in occupancy rates for Singapore REITs, it might be a good time to look at REITs but the reason I am not choosing a REIT is for the simple reason that I am lazy. Buying REITs, there might have a higher distribution cost and lower corporate tax, but it comes at a cost to a personal income tax. Typically REITs have a 2 tiered distribution, a component which is not taxable, and the other component is taxable. I am simply lazy to include it when filing for tax, and hence I’m looking for business trusts instead. Business trusts are not obligated by law to distribute at least 90% of income, but generally they do and since management has announced its policy so as previously mentioned, it should be okay to have a recurring income. Over time, as the green-field establishments get upgraded and with the services fees increasing each year, hopefully the distribution will increase over time as well.


So what are some of the -ve things to consider?

INR currency

As with all companies who have their business outside of Singapore, it is unavoidable that there will always be currency exchange risks. Religare is no exception, with its business in India. Management have taken steps to mitigate this risk by entering forward contracts to hedge close to 100% of cash flows for distribution, which is a good thing. I don’t think anyone can accurately predict the INR/SGD rate in the near future and hedging to lock in a fixed rate is good as it provides certainty, which equates to a more stable distribution.

Exposure to India laws

With its’ assets situated in India, it is naturally subjected to Indian laws and government rulings. I am not very familiar with Singapore laws much less Indian laws, and taking a cursory glance at the prospectus, it might be scary, as it flags out issues such as not able to validate title deeds, ability to repossess land etc. Such an example is the disposal of economic interests in Fortis Hospotel Ltd to FHL. I am unsure of the difference between economic interest versus equity interest as I always thought they are the same. Guess I need to find out more. Regarding this, I can only put my trust in the managers to see that operations and things run smoothly over there.

Complex trust structure

religare health trust structure

Enough said. The trust structure diagram is complicated and confusing. I am also unsure of how the relationship between Religare and Fortis work out to be and it does not seem to be as simple as it is.

Fee Structure

Base fee – 50% paid in units

Perfomance fee – 50% paid in units

Development fee – payable in the form of either cash or units

As you can see, there is high potential for dilution, something to watch out for.


Conclusion

In closing, I think it is a fair price for its value and I plan to hold this share for a long long time. In the short run, there will definitely be a dip in revenue due to the Fortis Hospotel Ltd sale transaction to FHL, but I am optimistic of its’ long term prospects to be a dominant player in the India healthcare field. However, a part of me is unsure of how this can be beneficial to society as a whole in providing affordable healthcare as the hospital service business is to charge the patients a high fee for medical care. This is probably compounded more by the fact that the board of directors is mainly composed of finance trained people and only a single person with a degree in medicine in the mix. Any thoughts or comments? Let me know what do you think or if I am wrong in any area.

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