Fair value S$0.98
• 3Q12 DPU of 1.68 S cents
• Maintain core focus on Indonesia
• Positives likely priced in
3Q12 results were within expectations
First REIT (FREIT) reported 3Q12 results which were in line with our expectations. Gross revenue increased 3.7% YoY to S$14.2m, driven by a full quarter of contribution from its Sarang Hospital (acquired in Aug 2011) and higher rental income from its other assets. Distributable amount to unitholders and DPU slipped 12.1% and 12.5%YoY to S$10.6m and 1.68 S cents, respectively. This is unsurprising given the absence of a special distribution of S$2.2m (S$0.34 per unit) in 3Q11 which arose from a gain from the sale of the Adam Road property (four equal tranches paid from 3Q11 to 2Q12). For 9M12, gross revenue climbed 5.4% to S$42.2m and formed 71.4% of our full-year forecast which includes our assumptions on the contribution from its proposed new acquisitions. Distributable amount to unitholders rose 9.6% to S$34.9m, or 74.8% of our FY12 estimate.
Abundant opportunities in Indonesia’s healthcare market
FREIT continues to see ample growth opportunities in
Indonesia’s underserved healthcare market. Demand for higher quality private healthcare services would likely gain traction moving forward, underpinned by a growing population, rising affluence and urbanisation rate. Hence we expect Indonesia to remain as FREIT’s core focus, especially since it has a right-of-first-refusal on its sponsor Lippo Karawaci’s (Lippo) Indonesian healthcare assets.
Maintain our HOLD rating
FREIT has lodged its Circular regarding its recent proposal to acquire two Indonesian properties from Lippo. An EGM will be held on 9 Nov to obtain unitholders’ approval. While we like FREIT for its visible and defensive income streams which would provide stability to unitholders, we believe that this has been factored in its share price, as reflected by its FY13F P/B ratio of 1.3x. Although this represents a 7.2% discount to its closest comparable peer Parkway Life REIT (1.4x), it is still a 20.8% premium to the S-REIT universe average of 1.1x. Maintain HOLD with an unchanged fair value estimate of S$0.98.
Overview of proposed acquisitions:
Siloam Hospitals Manado & Hotel Aryaduta Manado (MD)
The MD Property is an 11-storey mixed-use development with a basement level located in North Sulawesi Indonesia. It comprises Siloam Hospitals Manado and Hotel Aryaduta Manado, which sit on common land titles and share a common lobby but with separate entrances. Siloam Hospitals Manado is a four-level hospital which commenced operations on 1 Jun 2012 with 100 beds and is also a Centre of Excellence in trauma. Its target is to reach the maximum operational capacity of 224 beds in about three to four years’ time. Hotel Aryaduta Manado is a nine-level five-star hotel which began operations on 1 Jan 2011and currently has 200 guest rooms. The purchase consideration of MD to FREIT is S$83.6m, representing a 10.8% discount to the average of two independent valuations.
Siloam Hospitals Makassar (SHMK)
SHMK is a new seven-storey hospital located in the South Sulawesi Province of Indonesia. It only commenced operations on 9 Sep 2012 with 100 beds but has a target to reach its maximum operational capacity of 416 beds in about four to six years’ time. SHMK is also a Centre of Excellence in trauma and cardiology. Notable developments in the close vicinity of SHMK include Hotel Aryaduta Makassar, Tanjung Bunga Marketing Office, Celebes Convention Center, Trans Makassar Mall and Losari Beach. The purchase consideration of SHMK to FREIT is S$59.3m, which is a 9.8% discount to the average of two independent valuations.
Uptrend expected in Indonesia’s healthcare market
According to an independent research report published in FREIT’s Circular, Indonesia’s total healthcare expenditure is forecasted to grow at a robust CAGR of 19.8% to US$40b from 2007 to 2015. Private health expenditure is expected to grow at a slightly faster CAGR of 21.1%, versus 18.6% for government health expenditure. This robust growth trend suggests abundant opportunities ahead, underpinned by a growing population, rising affluence and urbanisation rate and increasing penetration of the universal public health insurance coverage. We expect FREIT to leverage on its entrenched relationship with its sponsor Lippo to capture the underserved healthcare market in Indonesia. Lippo has established a strong track record in Indonesia’s healthcare sector via its Siloam Hospitals brand name. This is evident in the 37% and 53% YoY surge in revenue and EBITDA to IDR811b and IDR153b respectively for its hospitals segment during its recent 1H12 results. FREIT has a rightof- first-refusal on Lippo’s Indonesian healthcare assets. Hence we expect Indonesia to remain as FREIT’s core market moving forward, although the group would also continue to explore opportunities in other parts of the region such as China, Malaysia and Australia.
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