OCBC Investment 2015-08-20: First REIT - Keeping our HOLD rating despite price correction.

FIRST REAL ESTATE INV TRUST AW9U.SI

Keeping our HOLD rating despite price correction

 Expecting stable growth
 Pipeline of ROFR assets
 Valuations still not attractive

First REIT’s (FREIT) recent 2Q15 results exhibited continued stable growth, with gross revenue and DPU increasing by 8.5% and 3.5% YoY to S$25.0m and 2.07 S cents, respectively. This was in-line with our expectations, and was driven by both organic growth and contribution from new acquisitions.
We project FREIT’s DPU growth to remain steady at 3.0% for FY15 and 1.0% for FY16. We have not factored in any potential acquisitions in our assumptions.

Siloam International Hospitals, which is the operator of FREIT’s Indonesian hospitals and a subsidiary of FREIT’s sponsor Lippo Karawaci, recently reported a solid set of 2Q15 results. Gross operating revenue jumped 24% YoY to IDR1,011b, while EBITDA accelerated 56% to IDR152b. This was underpinned by the ramp-up of new hospitals and higher inpatient admissions and outpatient visits.
The continued weakening of the IDR may also deter Indonesians, especially within the middle-class group, from seeking discretionary medical treatment overseas. This would potentially benefit Siloam’s hospitals.

Lippo Karawaci has been actively developing more hospitals in Indonesia and currently has a strong pipeline of 46 hospitals. This represents strong acquisition opportunities for First REIT since it has a right-of-first-refusal (ROFR) to Lippo Karawaci’s hospital assets.

Since we downgraded FREIT to a ‘Hold’ on 21 Jul 2015, its share price has corrected 7.4% to close at S$1.32. Nevertheless, we believe it is still too early to turn positive on the stock, as valuations are not yet attractive, in our view, with the stock trading at a forecasted FY15F and FY16F distribution yield of 6.3%. This is more than one standard deviation below its 5-year average forward yield of 7.3%.
Maintain our HOLD rating and S$1.36 fair value estimate on FREIT.

Wong Teck Ching Andy | http://www.ocbcresearch.com/ OCBC Investment Research 2015-08-14

HOLD Maintain HOLD 1.36 Same 1.36