SINGAPORE (May 25): OCBC Investment Research is maintaining its “buy” call on First REIT (FREIT) with a fair value estimate of $1.48.
However, S&P has downgraded the credit rating of the REIT’s sponsor, PT Lippo Karawaci (LK), to “B-“ with a negative outlook, citing concerns about the company’s thin liquidity buffer, especially in the face of substantial interest servicing needs.
In a Friday report, analyst Joseph Ng says, “FREIT’s recent results have also given us a glimpse of the downstream implication, as the level of receivables has been rising over the last few quarters, though this has not impacted FREIT’s ability to pay out regular DPUs as required.”
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Meanwhile, the analyst believes that LK is not likely to make a significant divestment of its stake in FREIT.
There still remains a possibility that LK may trim its 28.1% stake in FREIT, which in itself is already a reduced stake from 30.94% previously, the analyst thinks that this is unlikely to go less than 25% for two reasons.
Firstly, it would breach loan covenants, as well as create a challenging condition for both LK and its subsidiary, Siloam Hospitals, to conduct sales of future hospital assets to FREIT in the future.
“Up till 1Q18, Siloam has been highlighting LK’s cross-border asset-light strategy, and we think that it would be myopic to alter this structure significantly in order to meet short-term funding needs,” adds Ng.
Secondly, Ng believes that it is likely that LK is exploring more meaningful ways to improve its liquidity position, which in S&P’s view, should involve asset sales exceeding IDR 3 trillion to provide for about two years of cash flow requirements.
On the other hand, the REIT has recently entered into a $100 million unsecured term loan at less than 4% cost of debt for six months, with an option to extend for another six months. This facility is intended to refinance its $100 million 4.125% Fixed Rate Notes due on May 22.
“We believe management has taken this approach to give sufficient time for uncertainties to clear up before dipping back into the bond market again,” says Ng.
On balance, the analyst continues to be cautiously optimistic that the balance of probabilities should remain in the REIT’s favour.
As at 11.33am, units in FREIT are trading at $1.36 with a FY18 distribution yield of 6.4%.
