First REIT - CIMB Research 2016-10-20: New purchases to drive earnings growth

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FIRST REAL ESTATE INV TRUST AW9U.SI

First REIT - New purchases to drive earnings growth

• 3QFY16 results as expected, yoy improvement underpinned by new acquisitions.
• Inorganic growth to underpin DPU growth momentum.
• Gearing of 30% translates to debt headroom of S$70m, at 40% gearing target.
• We downgrade the stock from Add to Hold, DDM-based target price unchanged at S$1.38.

Results in line, lifted by new acquisitions 

• FIRT reported 3QFY16 distributable income of S$16.3m (US$11.8m), +4.7% yoy with DPU coming in at 2.12 Scts. 3Q/9MFY16 DPU were in line at 25%/75% of our full year estimates. 
• The improvement was underpinned by higher revenue of S$26.9m (US$19.5m), thanks to new contributions from Siloam Kupang and higher interest income from the first progress payment for the development works on new Siloam Hospitals Surabaya, partly offset by coupon payment on perpetual securities.

Good debt headroom with gearing at 30% 

• With its current master leases to be renewed from 2021 at the earliest, new acquisitions will continue to drive FIRT’s bottomline growth. 
• Gearing has dipped to 30% following repayment of debt with proceeds from the issuance of S$60m 5.68% perpetual securities in Jul 16, and no refinancing due till FY17. Based on a target gearing level of 40%, FIRT has further debt headroom of S$70m to debt fund potential new purchases.

Proposed acquisition of Yogyakarta asset still pending 

• The purchase of Siloam Hospitals Yogyakarta for S$40.8m (US$29.6m) is pending. The property is 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 the joint purchase.

Downgrade from Add to Hold on valuation grounds 

• We lower our recommendation from Add to Hold after FIRT’s share price outperformance. In view of the near term limited upside to our DDM-based target price at S$1.38 and lack of major near term catalyst, we think the stock would more likely perform in line with market. At current price, the stock offers FY17 DPU yield of 6%. 
• Upside risk to our call may come from new acquisitions which could boost bottomline and DPU yield further. A downside risk is rising interest rates that can erode earnings.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2016-10-20

CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 1.380 Same 1.380