First REIT - CIMB Research 2016-07-14: Continues to deliver

First REIT - CIMB Research 2016-07-14: Continues to deliver FIRST REAL ESTATE INV TRUST FIRST REIT

First REIT - Continues to deliver

  • 2Q16 results in line, 2Q16 DPU makes up c.25% of our FY16 forecast.
  • Improvement driven by stronger margins and new contributions from acquisitions.
  • Further earnings upside potential from the proposed purchase of Siloam Hospitals Yogyakarta.
  • Strong balance sheet, gearing of 30% post issuance of perpetual securities.
  • Maintain Add, with revised target price of S$1.38.

Boosted by acquisition growth

  • FIRT reported 2Q16 distribution income of S$16.2m (US$12m), +5.5% yoy, whilst DPU remained flat at 2.11 Scts on the back of a slightly expanded units base. 
  • The growth in earnings came from higher gross revenue of S$26.6m (+6.5% yoy), underpinned by new acquisitions such as the Kupang property and higher interest income from the first progress payment for the development works on the new Siloam Hospital Surabaya.
  • This more than offset the increased interest expense from new asset purchases.

NPI margin improved, good earnings visibility

  • NPI margin improved slightly to 98.9% with lower property expenses from Sarang Hospital in Korea. 
  • We expect FIRT’s income stream to expand steadily, thanks to its master lease structure and inbuilt escalation growth of c.2%. 
  • We expect the earliest renewal of its master leases to occur only from 2021, thus giving FIRT good income visibility over the next few years.

New purchases to further add to bottomline

  • We expect new acquisitions to continue driving FIRT's bottomline growth. 
  • The purchase of Siloam Hospitals Yogyakarta for S$40.8m (US$30.2m) is pending. The property is 97.1 part of a mixed development with a retail component, Lippo Plaza Jogja (proposed to be acquired by Lippo Malls Retail Trust), and discussions are still ongoing for this joint acquisition. We anticipate this purchase to be earnings-accretive based on a NPI yield of 9.4% vs. its current implied yield of 7.2%. This has not been factored into our forecasts.

Increased debt headroom for future acquisitions

  • The recent issuance of S$60m of 5.68% perpetual securities in July has lowered the trust’s gearing from 34.4% as at end Jun 16 to 30%. 
  • In addition, FIRT does not have any refinancing due till FY17. 
  • Based on a comfortable 40% gearing level, we estimate it has further debt headroom of S$70m to potentially fund new buys.

Maintain Add

  • We tweak our FY16-18 DPU estimates to factor in interest payments for its recently issued perpetual securities. However, our DDM-based target price is raised to S$1.38, on the back of slightly lower cost of equity of 7.9% (vs. 8.2%) as we adjust for lower long bond yields. 
  • We maintain our Add call. 
  • Our target price offers a total return of 12.6% and the pending acquisition of Siloam Yogyakarta offers potential earnings upside. 
  • Risks to our call are if risk free rates rises.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-07-14
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.38 Up 1.33