First REIT - CGS-CIMB Research 2019-01-17: Looking For Opportunities To Grow


First REIT - Looking For Opportunities To Grow

  • First REIT’s 4Q/FY18 DPU of 2.15/8.6 Scts was broadly in line with estimates, at 24.5%/97.8% of our 4Q/FY18 forecast.
  • The trust has good balance sheet capacity to go after acquisitions as it moves towards a more balanced Indonesia/outside-Indonesia portfolio mix.
  • We maintain our ADD call with a lower Target Price of S$1.20.

4Q/FY18 results within expectations

  • FIRST REAL ESTATE INV TRUST (SGX:AW9U, First REIT) reported 2.7% improvement in 4Q18 revenue to S$29.3m while distribution income increased 1.4% to S$17m (DPU: 2.15 Scts) on a slight compression in NPI margin.
  • For the full year, First REIT reported distribution income of S$67.7m, +0.4% y-o-y, which translates into a DPU of 8.6 Scts. Results were broadly in line with our estimates, at 97.8% of our FY18 forecast.
  • First REIT also recognised a fair value loss on investment properties of S$5.4m on a weaker rupiah and change in valuation discount rate.

New assets boost revenue, dragged marginally by higher expenses

  • First REIT’s 4Q18 revenue was higher y-o-y thanks to contribution from the Siloam Hospital Yogjakarta and organic growth from its existing properties. However, NPI margin slipped 0.7% pt to 97.3% during the quarter due to higher expenses incurred for Sarang Hospital and Indonesia properties.

Good debt headroom for inorganic growth opportunities

  • First REIT’s gearing stood at 35% as at end-4Q18 with 59% of its debt on fixed rates. The trust has S$100m of debt to be refinanced in 2019 and a further S$196m in 2021.
  • With decent debt headroom, we anticipate First REIT to pursue acquisition growth opportunities. Furthermore, it can also consider an asset recycling strategy to bolster its balance sheet.

New sponsor provides access to new markets

  • In Oct 2018, OUE LIMITED (SGX:LJ3) and OUE LIPPO HEALTHCARE LTD (SGX:5WA, OUELH) became major shareholders of First REIT with a total 17.8% stake while Lippo Karawaci (LK) still retains a 10.6% stake. Following this, First REIT’s has the first right of refusal to LK’s hospitals in Indonesia as well as OUE Lippo Healthcare’s properties around the region such as Australia, China, Japan, Malaysia and Singapore. This will enable it to diversify its portfolio which is currently heavily skewed towards Indonesia towards a more balanced target of a 50:50 mix of Indonesia vs. outside Indonesia markets.

Maintain ADD

  • We lower our FY19-20 DPU forecasts by 2.5-3.1% as we tweak our annual revenue growth assumptions marginally down. However, our DDM-based target price is reduced to S$1.20 from S$1.36 as we bake in a higher beta of 0.95x (vs. 0.9x previously) given First REIT's recent share price volatility, which we believe may continue until clearer geographic diversification plans are made known as well as confirmation of extension of master lease for four of its properties beyond 2021.
  • We maintain our ADD rating given the prospective 25% total return and expect catalysts mentioned above to narrow share price gap to target price in the longer term.
  • Downside risks include non-renewal or change in terms of master leases.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-01-17
SGX Stock Analyst Report ADD MAINTAIN ADD 1.20 DOWN 1.360