Parkway Life REIT's Japan profit slumps under weaker yen

But DPU still hit historical high.

According to CIMB, a weaker yen impacted Japan income, but this was more than compensated by the 2011/12 acquisitions, rental adjustments on CPI-pegged leases, and Japan asset enhancements.

This brought 4Q12 DPU to another historical high, commensurate with the share price. 4Q/FY12 DPUs were slightly above expectations at 27%/102% of our estimates and 27%/103% of consensus, on stronger NPI margins.

Here's more from CIMB:

We tweak DPUs on adjusted margins and organic growth expectations. Our DDM-based target price (6.7% discount rate) inches up on stronger inflation expectations imputed.

Another record quarter 4Q/FY12 NPI and DPU grew  6.1%/7.6% and 9.5%/7.5% yoy respectively, propped up by Japan and Malaysia acquisitions, and rent review on Singapore hospitals.

Singapore and Japan NPI margins inched up in 2012 to 95% and 87%(FY11: 94% and 86%), supported by higher rent from existing properties.

S$49.7m of revaluation gains on investment properties were booked on incorporation of the latest CPI increase on Singapore hospitals (+6% revaluation gain to Singapore assets). A weaker yen resulted in c.-14% downward revaluation to Japan assets, but offset by matching yen-denominated liabilities.

Management continues to embark on Japan AEIs, with the 6th AEI completed in 4Q generating ROI of 10%. We expect more of this to come, a positive, but for growth to be largely underpinned by rent adjustments on the back of inflation pressures in Singapore, and on acquisitions.

While trading at a steep 1.5x P/BV, the stock is supported by the certainty of revaluation gains on the Singapore portfolio on the back of strong rental adjustments for the CPI-pegged leases for the next 2-3 years, and normalised inflation rates thereafter.

FY12 dividend yield of 4.5% and the potential for DPU growth of 6-8% over FY13/14 warrants holding on to the stock, in our view.