First REIT - Phillip Securities 2018-10-17: Waiting For A Sign

FIRST REAL ESTATE INV TRUST (SGX:AW9U)

First REIT - Waiting For A Sign

First REIT's 3QFY18 NPI and DPU were in line with our forecast. 5.1% and 5.4% y-o-y boost in Gross Revenue and NPI, respectively, driven by two acquisitions made in 4Q17.
Potential expanded ROFR pipeline and improvement in tenant concentration from proposed transaction announced in September.
No marked improvement in outstanding receivables even accounting for the S$17.5mn of rental payments received on Oct 15 that was disclosed by First REIT.
Maintain NEUTRAL with lower Target Price of S$1.30.

Though First REIT possesses a triple-net lease structure, its property operating expenses were lower by 13.8% in 3QFY18 due to lower expenses incurred for its Indonesia properties. This translates to an improved NPI margin of 99.0% in 3QFY18 from 98.7% in 3QFY17.

Basing on the proposed transaction announced on Sep 19 (read our full report First REIT - A New Dawn), First REIT could have potential expanded pipeline assets by having a dual ROFR from both Lippo Karawaci (LPKR) and OUE Lippo Healthcare (OUELH). This will also help lower the tenant concentration risk moving forward given that LPKR is currently the single biggest lessee of its properties.

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Outstanding receivables rose 70% q-o-q to S$49.3mn due to advance rental receivables from tenants.
While S$17.5mn of rental payments was received on Oct 15 as disclosed by First REIT, receivables would still have increased c.9.3% q-o-q. However, a bright spot could emerge if and when the cash infusion into LPKR from its potential divestment of stake in First REIT and its Manager could be used to pay outstanding rental owed to First REIT.

While outlook has improved for First REIT's receivables from a potential positive spillover effect into rentals owed by LPKR, it remains to be seen if there could be any marked improvement in the near-term given that the transaction is still pending the relevant approvals. Until such an improvement comes about, we remain Neutral on First REIT.
Current gearing of 36.7% affords a debt headroom of c.S$44.5m (assuming 40% gearing) to pursue inorganic growth.

We lower our DPU estimates as we had previously factored in an acquisition to have materialised in 3QFY18. Accordingly, our target price was lowered to S$1.30.
Our target price translates to a FY18e yield of 6.7% and a P/NAV of 1.20x.

Tara Wong Phillip Securities Research | https://www.stocksbnb.com/ 2018-10-17

SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.30 DOWN 1.310