• First REIT’s 3Q/9MFY18 results were slightly below our projection.
• New acquisitions underpin revenue growth, gearing of 34.9% provides debt headroom for inorganic growth opportunities.
• Upgrade to ADD from Hold, Target Price tweaked down slightly to S$1.36.

3Q/9MFY18 Results Highlights

First REIT reported 3Q18 gross revenue of S$29.2m, +5.1% y-o-y while net property income grew 5.4% y-o-y to S$28.9m. Distribution income increased a slower 1.4% y-o-y to S$16.9m on higher interest expense.

First REIT’s 3Q/9M18 DPU of 2.15 Scts/6.45 Scts was slightly below our projection at 23.7%/71.1% of our FY18 forecast.

Topline Driven by New Acquisitions

Topline improved due mainly to contributions from Siloam Hospitals Buton and Lippo Plaza Buton (acquired in Oct 17) as well as Siloam Hospitals Yogjakarta (bought in Dec 17).

We estimate these properties could have added 4.5% to our FY18 revenue forecast. There was also organic growth within its existing portfolio assets.

More Headroom for Inorganic Growth Opportunities

First REIT has S$100m debt maturing in 4Q18 and minimal refinancing needs over FY19-20. The bulk of its debt is on fixed rate terms which should help to mitigate the impact of higher interest rates.

First REIT’s gearing stands at 34.9% as at end-3Q18, providing the trust with good debt headroom to pursue acquisition growth opportunities.

Share Price Drag From Macro and Corporate Events

While remaining operationally robust, First REIT’s share price was beaten down recently on the back of market concerns over rising interest rates as well as uncertainty following the divestment by major shareholder Lippo Kawaraci (LK) of a 10.63% stake in First REIT to OUE Lippo Healthcare (SGX:5WA) for S$102.7m (or at S$1.23/unit) as well as the sale of the REIT Manager, Bowsprit Capital, to OUE Limited (SGX:LJ3) and OUE Lippo Healthcare.

Post sale, Lippo Kawaraci has a remaining 10.63% stake in First REIT. Following this transaction, First REITwill also have the right of first refusal over OUE Lippo Healthcare’s healthcare assets.

Upgrade to ADD

We tweak our FY18-20 DPU estimates post results. In addition, we lower our DDM-based Target Price to S$1.36 on higher cost of equity assumption of 8.1%.

Following the share price decline, First REIT is trading at 7.5% FY18 yield, the highest level since 2016. Hence, we upgrade our rating to ADD.

Key upside catalysts include attractive valuations and potential accretive new acquisitions while downside risks include possible overhang uncertainty on remaining stake in First REIT.

Source: CGS-CIMB Research - 16 Oct 2018