MedicX Fund — Update 11 August 2016

MedicX Fund — Update 11 August 2016

MedicX Fund

Martyn King

Written by

Martyn King

Director, Financials

MedicX Fund

More Irish expansion

Q3 NAV update

Real estate

11 August 2016

Price

89.32p

Market cap

£340m

Net debt (£m) at end FY15

281.4

Shares in issue

381.4m

Free float

100%

Code

MXF

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.1

(1.9)

8.6

Rel (local)

(0.1)

(11.2)

6.9

52-week high/low

91.75p

77.25p

Business description

MedicX Fund is a specialist investor in primary care infrastructure. It holds a portfolio of properties let mainly to government-funded (NHS) tenants (87% of rent) and pharmacies on GP surgery sites (8%). It now has three properties under development in the Republic of Ireland, where the lead tenant (60-75%) will be the Health Service Executive (HSE).

Next event

Year end results

December 2016

Analysts

Martyn King

+44 (0)20 3077 5745

Julian Roberts

+44 (0)20 3077 5748

MedicX Fund is a research client of Edison Investment Research Limited

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
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

EPRA NAV/
share (p)

Yield
(%)

DCF/share**
(p)

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)

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

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by MedicX Fund and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by MedicX Fund and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: Healthcare

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