First REIT - OCBC Investment 2018-01-19: Valuations Suggest Further Upside

First REIT - OCBC Investment 2018-01-19: Valuations Suggest Further Upside FIRST REAL ESTATE INV TRUST AW9U.SI

First REIT - Valuations Suggest Further Upside

  • FY17 DPU rose 1.2% y-o-y.
  • 2-3 acquisitions as a base case in 2018.
  • Relatively undervalued still.

FY17 results within expectations 

  • First REIT’s (FREIT) year-end scorecard was within our expectations. Gross revenue for 4Q17 and FY17 rose 5.8% and 3.7% y-o-y to S$28.6m and S$111.0m, respectively. DPU for the full year rose 1.2% y-o-y to 8.57 S-cents, forming 99.8% of our full-year forecast. 
  • For 4Q17, growth came on the back of a full quarter’s contribution from Siloam Hospitals Labuan Bajo (acquired in Dec 2016), and initial contributions from Siloam Hospitals Buton and Lippo Plaza Buton and Siloam Hospitals Yogyakarta, which were acquired in Oct 17 and Dec 17, respectively.
  • As at 31 Dec 2017, First REIT’s gearing remained healthy at 33.6%. First REIT has also secured up to S$400m in syndicated secured financing facilities, which we understand will help to refinance the term loan facility due over 2018-2019. 
  • We note that there is also a S$100m bond due in May 2018, and deem it likely that First REIT will conduct a refinancing bond issuance.

Acquisitions should continue in 2018 

  • Moving forward, we expect First REIT to continue to explore yield-accretive assets to add into its portfolio. As a base case, we believe that First REIT should be able to do 2-3 acquisitions this year, with each asset in the S$20-30m range. 
  • In our opinion, a faster-than-expected rate of acquisitions could surprise on the upside, and remains a live possibility at this juncture. We note that S&P has recently downgraded First REIT’s sponsor (Lippo Karawaci) to ‘B’, with one of the main reasons being tighter liquidity forecasted over the next 12 months. We believe that this could be one of the reasons for an increase in First REIT’s receivables this quarter. Thus, to raise cash, it is plausible that the sponsor could inject larger assets into First REIT, possibly giving DPU a lift.

Relative value still apparent 

  • In terms of valuations, we continue to observe value on a relative basis. First REIT currently trades at a FY18F P/B ratio of 1.39x, lower than Parkway Life REIT’s FY18F consensus P/B ratio of 1.70x. Parkway Life REIT’s current premium of 22.3% is significantly higher than the 5-year premium of 13.7%. 
  • As we roll forward our valuations and incorporate contributions from Siloam Hospitals Yogyakarta, our fair value estimate rises from S$1.44 to S$1.48.

Joseph Ng OCBC Investment | 2018-01-19
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.48 Up 1.440