SINGAPORE (Apr 19): OCBC Investment Research is maintaining its “buy” call on First REIT with an unchanged fair value estimate of $1.48, on expectations of more DPU-accretive acquisitions in the year ahead to further boost its unit price.
While Phillip Capital also sees the REIT to benefit from organic growth in the near-term, it is keeping “neutral” on rich valuations, while lowering its target price to $1.31 from $1.32 previously after adjusting for a different set of assumptions that follows a change of analyst.
This comes after the REIT manager on Tuesday declared a 1Q18 DPU of 2.15 cents, which is marginally up from 2.14 cents a year ago on new contributions from its acquisitions of Siloam Hospitals Buton & Lippo Plaza Buton and Siloam Hospitals Yogyakarta in late 2017.
See: First REIT's 1Q earnings get a boost from new acquisitions
In a Thursday report, OCBC lead analyst Joseph Ng reiterates his base case expectations for the REIT to make two to three more acquisitions in late FY18 within the $20-30 million range per asset.
With only about 51% of First REIT’s debt on a fixed rate or hedged basis as at end-March, Ng thinks the REIT manager is working on bringing this towards the 75-80% range.
“We believe that PT Siloam International Hospitals TBK’s assets would be likely [acquisition] targets, as opposed to those owned directly by its sponsor (Lippo Karawaci). Nonetheless, we believe that management would still be disciplined by only making DPU-accretive acquisitions, with the initial rental yield being around the 9-10% handle,” he adds.
Despite investor concerns of rising receivables, which could be due to tighter liquidity on the sponsor’s end, says Ng, he believes both the REIT manager and the sponsor are confident of addressing this issue in the near future.
However, Phillip Capital lead analyst Tara Wong thinks the rise in receivables could signal potential further ageing, and highlights how the REIT’s sponsor was recently issued a credit downgrade by Fitch on the back of a significantly reduced cash flow access.
While Wong similarly acknowledges the REIT has ample debt headroom to pursue inorganic growth via its sponsor’s pipeline of hospitals this year, she highlights that the REIT is currently trading at the upper range of its post-global financial crisis (GFC) average valuation boundaries.
“Potential catalysts include an improvement of the sponsor’s creditworthiness while downside risks include a similar tax regulation change that would affect FIRT. Our target price translates to a FY18E yield of 6.8% and a P/NAV of 1.19 times,” she concludes.
As at 10.36am, units in First REIT are trading 1 cent higher at $1.38 to imply FY18 distribution yields of 6.4% and 6.5% based on OCBC and Phillip estimates, respectively.
