First REIT S$1.210 S$ Intrinsic Value Prev Close. 13 November

Transcription

1 First REIT First-Rate Acquisitions To Follow First-Class Results Increase Exposure Intrinsic Value Prev Close S$1.210 S$0.960 Update: We maintain our Increase Exposure rating on First REIT ( Company ), based on an upgraded intrinsic value of S$ representing an upside of 26.0% over its last traded price of S$ Key Developments: First REIT grew on an impressive set of 2Q10 results by releasing solid 3Q10 numbers on 22 nd October Gross revenue and net property income increased 4.6% (3Q10: S$7.9m, 3Q09: S$7.6m) and 3.7% (3Q10: S$7.8m, 3Q09: S$7.5m) YoY respectively. Third quarter 2010 distribution amount grew 2.5% YoY (3Q10: S$5.4, 3Q09: S$5.2m) with distribution per unit for the period expanding from 1.90 Scts in 3Q09 to 1.94 Scts in 3Q10. On an annualized basis, DPU also improved YoY from 7.62 Scts in 3Q09 to 7.70 Scts in 3Q10. On 9 th November 2010, the Company announced that it would be acquiring two Jakarta hospitals, the Mochtar Riady Comprehensive Cancer Centre and Siloam Hospitals Lippo Cikarang for a total consideration of S$205.5m. Part of the acquisitions will be funded by a rights issue of approximately S$172.8m. Main Activities First Real Estate Investment Trust ( Company ) invests in a diversified portfolio of income producing real estate used for healthcare and/or healthcare-related purposes. The Company s assets are located in Singapore and Indonesia. Financial Highlights Dec YE (S$m) FY08A FY09A FY10E Gross Revenue Net Prop Income Distr Earnings Distr Per Unit (S$) Non-Curr Assets Op Cash Flow , Bloomberg, SIAS Research Key Ratios Price Earnings (x) 6.91 Price Book (x) 0.92 Return on equity (%) Return on assets (%) Source: Bloomberg Indexed Price Chart First REIT (White) Straits Times Index (Orange) FTSE ST RE Invest Trust Index (Yellow) Outlook: First REIT s robust portfolio of high-yielding, medical-related real estate investments has again impressed with the Company s 3Q10 results coming in above our prior third quarter estimates. With their new acquisitions in place, the Company will be above to increase its asset base, improve its overall weighted average lease to expiry and importantly increase DPU and dividend yield. At its current price, we opine that the Company is still undervalued. Page 1 of 12 Source: Bloomberg 52wks High-Low Number of Shares Market Capitalization Analyst: Moh Tze Yang, Lead Analyst tzeyang@siasresearch.com Tel: S$0.990 /S$ m S$ m

2 Top and bottom lines continue to impress in 3Q10 Continued Strong Financial Figures Reported In 3Q10: First Real Estate Investment Trust ( Company ) announced their financial year 2010 second quarter earnings on 22 nd October The Company has continued its robust trend in 2010 of posting impressive quarterly results as 3Q10 saw upticks in all of the Company s key financial performance barometers. Gross revenue and net property income increased 4.6% (3Q10: S$7.9m, 3Q09: S$7.6m) and 3.7% (3Q10: S$7.8m, 3Q09: S$7.5m) YoY respectively - with the inclusion of deferred rental income of properties under asset enhancement. Third quarter 2010 distribution amount grew 2.5% YoY (3Q10: S$5.4, 3Q09: S$5.2m) with distribution per unit for the period expanding from 1.90 Scts in 3Q09 to 1.94 Scts in 3Q10. On an annualized basis, DPU also improved YoY from 7.62 Scts in 3Q09 to 7.70 Scts in 3Q10. Figure 1: First REIT 3Q YoY relative performance 3Q10 3Q09 Gross Revenue (S$m) 7.9* 7.6 Net Prop Inc (S$m) 7.8* 7.5 Distri Amt (S$m) Distri Yield (%) **, SIAS Research *Includes deferred rental income of property under asset enhancement **Based on closing price of S$0.715 as at 20th October 2009 Figure 2: First REIT 9M YoY relative performance 9M10 9M09 Gross Revenue (S$m) 23.5* 22.5 Net Prop Inc (S$m) 23.2* 22.3 Distri Amt (S$m) Distri Yield (%) **, SIAS Research *Includes deferred rental income of property under asset enhancement **Based on closing price of S$0.715 as at 20th October 2009 We are equally encouraged by First REIT s year to 30 th September performance as gross revenue (9M10: S$23.5m, 9M09: S$22.5m), net property income (9M10: S$23.2, 9M09: S$22.3m) as well as distributable amount (9M10: S$15.9m, 9M09: S$15.7m) all posted sturdy growth rates of 4.6%, 4.3% and 1.4% YoY respectively. 9M10 gross revenue and net property income figures include the deferred rental income of properties under asset enhancement. For the nine month period ending 30 September, 2010 distribution per unit for the period was 5.76 Scts compared to 5.70 Scts for 9M09; while 2010 annualized DPU stood at 7.70 Scts compared to 7.62 Scts for 9M09. First REIT maintains a very healthy distribution yield of 8.1% (based on a market closing price of S$0.95c as at 20 th October 2010), which is among the highest in the S-REIT sector. Page 2 of 12

3 Figure 4: First REIT yield one of S-REIT's highest Figure 4: Consistent quarterly DPU payouts Geographically, First REIT s Indonesian assets generated 86.6% (S$6.9m) of the Company s 3Q10 revenues, against 86.3% (S$6.5m) for 3Q09. Going forward, we understand from management that First REIT will be able to enjoy a variable rental growth component of 1.25% of total gross revenue from their four Indonesian assets in FY2010. The Company s Singapore assets contributed 13.4% (S$1.1m) to First REIT s top line over 3Q10, compared to 13.7% (S$1.0m) in 3Q10. As stated in our last update report on First REIT (First Class 2Q10 Results, 27 July 2010), we continue to expect the contribution from the Company s Singapore assets to expand further with the completion of asset enhancement works on the Company s Pacific Cancer Centre@Adam Road. Management has guided that this project is on track to be completed by mid Figure 5: First REIT rental income by geography *includes deferred rental income of property under asset enhancement Page 3 of 12

4 Working capital remains healthy on solid current asset base Healthy Working Capital-Backed Balance Sheet: As at 30 th June 2010, First REIT s balance sheet position remains solid as at 30 th September 2010 with net asset value per unit standing at Scts - against end-fy2009 s NAV per unit of Scts. The Company s total assets as at end-3q10 amounted to S$359.3m, comprising S$346.1m of non-current assets and S$13.2m of current assets. Total liabilities stood at a total of S$89.2m, accounted for as S$78.8m of non-current liabilities and S$10.3m of current liabilities. Total unit holders fund for 3Q10 is a sound S$270.1m. First REIT s working capital, taken as current assets against current liabilities, stands at a healthy 1.28x as at end-september Low Debt Levels: First REIT s total debt as at 30 th September 2010 was recorded at S$57.3m - an increase of S$4.5m over end-2009 s amount. Interest coverage had fallen from 13.5x to 11.6x with the Company s debt-to-property ratio rising by from 15.5% as at 31 st December 2009 to 16.5% as at 30 th September That said, we maintain our view that First REIT s gearing is very well managed as the Company s current level of 16.5% is still significantly below the regulatory limit of 35%. New value accretive acquisitions to raise earnings/dpu Acquisitions Of Two New Assets: On 9 th November 2010, First REIT announced that it would be acquiring two Jakarta hospitals, the Mochtar Riady Comprehensive Cancer Centre ( MRCC ) and Siloam Hospitals Lippo Cikarang ( SHLC ) for a total consideration of S$205.5m. MRCC is to be acquired from Wincatch Limited for S$170.5m and SHLC will be purchased form PT Lippo Karawaci Tbk for S$35m. To partially finance the acquisitions, First REIT has announced plans to raise approximately S$172.8m in gross proceeds through a rights issue to eligible unit holders on a pro-rata basis of five rights units for every four existing units - at an issue price of S$0.50 per unit (345,664,382 new units). Specifically, we understand that the purchase of MRCC as well as related transaction costs will be completed via: 1) Proceeds from rights issue. 2) New term loan facility of up to S$50m from Oversea-Chinese Banking Corporation Limited. Page 4 of 12

5 While the purchase of SHLC will be completed via: 1) Proceeds from rights issue. MRCC, to begin operations in December 2010, is a 29 storey, 160 bed location that is to be Indonesia s first private comprehensive cancer treatment center that is equipped with state of the art cancer treatment and diagnostic facilities. It will be the first facility in the whole of Indonesia to offer Positron Emission Tomography (PET) scanning, High Intensity Focused Ultrasound (HIFU) and Radioimmunotherapy. MRCC is located near Plaza Semanggi, the Aryaduta Suites Hotel Semanggi as well as other five-star hotels in the central business district of South Jakarta. Figure 6: Mochtar Riady Comprehensive Cancer Centre SHLC, which has been in operations since 2002, is a six-storey hospital with the capacity to accommodate 75 beds by end It is situated in the growing residential and industrial areas of East Jakarta offering a broad range of general and specialist services such as A&E, orthopedic, neurology, urology, thorax, and cardiovascular surgery. The hospital also has Centres of Excellence in Urology, Internal Medicine and Trauma. In particular, SHLC is well-respected for its Pediatric Neonatal Intensive Care Unit for premature, sick babies. Page 5 of 12

6 Figure 7: Siloam Hospitals Lippo Cikarang Following the acquisition of both assets, management has guided that First REIT s distribution in projection for 2011 is expected to rise from 8.57% (distribution yield before acquisition calculated based on 4 th November 2010 closing price of S$0.95 per unit) to 9.14% (distribution yield after acquisition based on TERP of S$0.70 per unit). This forecast is based on an estimated annualized DPU of 6.40 Scts for the full financial year ending 31 st December 2010, in relation to its enlarged portfolio and financing through a combination of the underwritten renounceable rights issue. In addition, upon completion of the purchase for the two assets, First REIT management has also expressed that they expect to see an increase in annual gross rental income of approximately 80% - from S$30.3m in forecast year 2010 to S$54.5m in projection year 2011 as a result of the enlarged portfolio. Consequent distributable income is also estimated to rise by 89% from S$21.3m to S$40.3m. Leverage will also be lowered from 18.6% to 17.25% in projection year Page 6 of 12

7 Figure 8: GFA by business (current/enlarged portfolio) Figure 9: Gross rental income by geography (current/enlarged portfolio) We are of the opinion that the acquisitions of MRCC and SHLC hold significant upside potential for First REIT going forward. Importantly, with the substantial lack of proper healthcare facilities and qualified medical practitioners in Indonesia, ownership of such assets becomes veritable gold mines for landlords. We noted a lack of understanding and education on the part of the investing community with regards to the potential of Indonesian healthcare facilities during our attendance at First REIT s 2Q10 results briefing. That said, the numbers do not lie and the financial performance capability of First REIT s Indonesian assets is very apparent as results are posted each quarter. Bearing that in mind, we view the strategic addition of the two new Indonesian assets as astute and value accretive. Page 7 of 12

8 First REIT Value Proposition The Bottom Line: First REIT s robust portfolio of high-yielding, medical-related real estate investments has again impressed with the Company s 3Q10 come in above our prior third quarter estimates. All three core income statement areas of gross revenue, net property income as well as distributable income registered solid YoY expansions. This improvement can largely be attributed to the quality of the Company s Indonesia properties as well as strong demand for proper healthcare facilities and services in Indonesia. We also expect First REIT s Singapore assets to contribute further to the Company s top and bottom lines on the completion of asset enhancement works at the Pacific Cancer Centre@Adam Road. In addition, First REIT has also confirmed with their tenant on a new extension block to the Company s Lentor Residence nursing home. The proposed extension is valued at S$4.5m and is expected to commence after receiving necessary regulatory approvals. Significantly, with the announcement of two new asset additions to First REIT s portfolio, we believe that the Company stands to benefit substantially going forward. Via long term master lease agreements on both MRCC and SHLC, First REIT is able to take advantage of increased income stability as well as improve the Company s overall weighted average lease to expiry (10.6 years as at end-september 2010 to 12.4 years). The REIT s absolute asset base will also be consequently increased, which would raise the profile of the Company and enhance its competitive positioning and ability to pursue future acquisitions. For First REIT investors, currently already receiving one of the highest yield payouts in the S-REIT sector, DPU going into 2011 is forecasted to increase further providing even higher returns. Figure 10: First REIT internal forecast based on completed acquisitions Page 8 of 12

9 On the back of the third quarter s salient results as well as forthcoming acquisition of MRCC and SHLC, we have revised our estimates and valuation on the counter. Based on TERP of S$0.70 per unit, our model suggests a robust potential 2011 post-acquisition dividend yield of between 8.91% and 9.33% for investors. We further upgrade First REIT at a derived intrinsic value of S$ based on revised FY11 estimates. At its current price, we opine that the Company is still undervalued. For prudence, we have not accounted for the DPU growth potential from the Company s arrangement with tenants that accords First REIT a percent of these tenant s earnings in our valuation. Recommendation: Increase Exposure Figure 11: First REIT one year price-volume Source: Bloomberg Figure 12: First REIT portfolio breakdown as at end-september 2010 Page 9 of 12

10 Figure 13: First REIT Indonesia asset details as at end-september 2010 Figure 14: First REIT Singapore asset details as at end-september 2010 Page 10 of 12

11 Summary Financial Table (Dec YE) Total Return (S$m) FY2007A FY2008A FY2009A FY2010E Gross Revenue Net Property Income Distributable Earnings Distribution Per Unit (S$) Financial Position (S$m) FY2007A FY2008A FY2009A FY2010E Non-current assets Current assets Current liabilities Non-current liabilities Cash Flow (S$m) FY2007A FY2008A FY2009A FY2010E Operating cash flow Investing cash flow Financing cash flow , Bloomberg, SIAS Research estimates Page 11 of 12

12 Rating Definition: Increase Exposure The current price of the stock is significantly lower than the underlying fundamental value. Readers can consider increasing their exposure in their portfolio to a higher level. Invest The current price of the stock is sufficiently lower than the underlying fundamental value of the firm. Readers can consider adding this stock to their portfolio. Fairly Valued The current price of the stock is reflective of the underlying fundamental value of the firm. Readers may not need to take actions at current price. Take Profit The current price of the stock is sufficiently higher than the underlying fundamental value of the firm. Readers can consider rebalancing their portfolio to take advantage of the profits. Reduce Exposure - The current price of the stock is significantly higher than the underlying fundamental value of the firm. Readers can consider reducing their holdings in their portfolio. IMPORTANT DISCLOSURE SIAS Research Pte Ltd received compensation for conducting this valuation research. The estimated fair value of the stock is statement of opinion, and not statement of fact or recommendation on the stock. As of the date of this report, the analyst and his immediate family may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add or dispose of or may be materially interested in any such securities. Portfolio structure should be the responsibility of the investor and they should take into consideration their financial position and risk profile when structuring their portfolio. Investors should seek the assistance of a qualified and licensed financial advisor to help them structure their portfolio. This research report is based on information, which we believe to be reliable. Any opinions expressed reflect our judgment at report date and are subject to change without notice. This research material is for information only. It does not have regards to the specific investment objectives, financial situation and the particular needs of any specific person who may receive or access this research material. It is not to be construed as an offer, or solicitation of an offer to sell or buy securities referred herein. The use of this material does not absolve you of your responsibility for your own investment decisions. We accept no liability for any direct or indirect loss arising from the use of this research material. We, our associates, directors and/or employees may have an interest in the securities and/or companies mentioned herein. This research material may not be reproduced, distributed or published for any purpose by anyone without our specific prior consent. Page 12 of 12