A merger stock with 8% dividend yield and 50% potential upside
This property company has significant potential, according to a team of City analysts. Graeme Evans looks at this ‘compelling opportunity for investors’.
19th August
by Graeme Evans from interactive investor
A “compelling opportunity” to buy 8% yielding Primary Health Properties
PHP was today flagged after a City firm examined prospects for the NHS landlord’s Assura AGR
merger.
Peel Hunt lifted its price target by 10p to 120p, highlighting the potential for sector-leading returns backed up by one of the most secure income streams.
The planned merger with the fellow FTSE 250-listed landlord is on track to form the UK’s eighth-largest real estate investment trust (REIT), with each portfolio currently valued at around £3 billion. PHP holds 517 assets compared with Assura’s 609.
Most of Primary’s facilities are GP surgeries, with other properties let to NHS organisations, HSE in Ireland, pharmacies and dentists.
This means about 89% of rent is funded by the UK and Irish governments, whereas the equivalent figure for Assura is 65% of the rent roll following a move into private healthcare.
Both estates benefit from high occupancy of 99% and have a combined weighted average unexpired lease term of 11 years.
Around a third of income is subject to inflation-linked uplifts, with the balance being open market reviews where rents are currently rising at about 3.6% per year.
PHP shares today stood at 92.5p, down from 103p in mid-June and 5% lower since last week’s disclosure that it has fended off private equity giant KKR in the battle for Assura.
The offer has been declared unconditional with acceptances totalling 63% of Assura’s register, while Peel Hunt is optimistic that the Competition and Markets Authority (CMA) clearance will mean full integration by the year end.
At a 12% discount to net asset value, the bank points out that a return to PHP’s historical valuation rating would imply a share price upside of 25-50%.
It adds that the valuation remains attractive in the current interest rate environment given that the spread between PHP’s earnings per share yield on current net asset value of about 7% and the five-year swap rate of 3.7% compares favourably to the long-term average.
Peel Hunt said PHP boasts a strong track record, having achieved 29 consecutive years of dividend increases and a compound total shareholder return of nearly 11% per year over the past 25 years.
It points out that the company has consistently outperformed the broader UK real estate index across most time frames, with superior property returns compared to Assura in seven of the past nine years.
The bank adds: “PHP’s share price has approached its 12-month low, despite the anticipated benefits of the Assura transaction. With the shares yielding 8% for 2026, this presents a compelling opportunity for investors in our view.”
Risks to the Buy recommendation include higher-than-expected interest rates, a lacklustre investment market that inhibits PHP’s ability to sell assets and potential action by the CMA.
