First REIT - OCBC Investment 2017-12-11: Still Relatively Undervalued

FIRST REAL ESTATE INV TRUST AW9U.SI

First REIT - Still Relatively Undervalued

Siloam International Hospitals TBK (Siloam) registered a healthy set of top-line and operational results in 3Q17, as reported at end-Oct 2017. Gross operating revenue grew 21% YoY to Rp 1.53 trillion in 3Q17, and 12% YoY to Rp 4.3 trillion in 9M17.
In terms of outpatient visits, 3Q17 saw a 30% increase to ~586.6k visits, while in-patient admissions also witnessed a healthy 20% YoY growth to 48.6k admissions.
While emergency visits saw a more lacklustre 1H17, 3Q17 saw Siloam clock a 24% YoY increase to 69.2k visits, contributing to an overall 3% growth on a 9M17 basis. These set of figures augur well for First REIT’s (FREIT) topline, as the rent from its Indonesian assets has a variable component pegged to gross revenue growth.

According to the Singapore Department of Statistics, the latest reported inflation for October 2017 was up 0.4% YoY, resulting in JanOct 2017 registering 0.6% YoY growth. The median Bloomberg consensus for 2017’s CPI currently stands at 0.6% YoY.
We continue to expect positive base rental revisions for FREIT’s Indonesian assets, as they are pegged to two times Singapore’s CPI (subject to a floor of 0% and cap of 2%).

First REIT currently trades at a FY17F P/B ratio of 1.38x, lower than Parkway Life REIT (PLREIT)’s 1.66x (based on Bloomberg’s consensus). As mentioned in our last report, Parkway Life REIT typically trades at a premium of 14.6% over a 5-year period, and there still is a considerable gap of 20.3% at this juncture. Given the mild inflationary environment in Singapore and continued revenue growth in the underlying asset base, it would be reasonable to expect the P/B chasm to narrow.
Also, having raised Rp 3.1 trillion following the completion of its second rights issue, Siloam now has the dry powder necessary to develop and/or expand its hospital portfolio. This would help to enlarge FREIT’s ROFR asset pool, which it can tap on for accretive acquisitions.
Maintain BUY with a S$1.44 FV estimate.

Joseph Ng OCBC Investment | http://www.ocbcresearch.com/ 2017-12-11

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.440 Same 1.440