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Brokers' take: CGS-CIMB upgrades First Reit to 'add' on attractive yield; PhillipCapital maintains 'neutral'

CGS-CIMB has upgraded First Real Estate Investment Trust (First Reit) to "add" as fiscal 2018 yield hits 7.5 per cent, the highest level since 2016 following its share price decline in recent times.

Analyst Lock Mun Yee and Eing Kar Mei said that the key upside catalysts for the stock include attractive valuations and potential accretive new acquisitions, as they tweaked its target price down to S$1.36 from S$1.41. 

"While remaining operationally robust, 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 Karawaci of a 10.63 per cent stake in First Reit to OUE Lippo Healthcare (OUELH) for S$102.7 million as well as the sale of the Reit manager, Bowsprit Capital, to OUE and OUELH," they wrote in a research note.

Following the sale, Lippo Karawaci would have a remaining 10.63 per cent stake in First Reit, which would also have the right of first refusal over OUELH’s healthcare assets.

Their analysis comes after First Reit posted its third-quarter results, which had third-quarter distribution per unit (DPU) edging up 0.5 per cent year on year to 2.15 Singapore cents for the three months ended Sept 30.

Gross revenue increased by 5.1 per cent to S$29.24 million, while net property income rose 5.4 per cent to S$28.94 million, lifted by contributions from its latest acquisitions, Siloam Hospitals Buton & Lippo Plaza Buton and Siloam Hospitals Yogyakarta, as well as from existing properties.

Ms Lock and Ms Eing said: "We estimate these properties could have added about 4.5 per cent to our FY2018 revenue forecast. There was also organic growth within its existing portfolio assets."

They also said that its gearing of 34.9 per cent as at end-Q3 2018 could give it space to pursue acquisition growth opportunities. 

Meanwhile, PhillipCapital maintained its "neutral" call, with analyst Tara Wong lowering the target price to S$1.30 from S$1.31 - which translates to a yield of 6.7 per cent for the 2018 financial year.

Ms Wong said that a concern was slow receivables collection - receivables would have increased 9.3 per cent quarter on quarter. 

"However, a bright spot could emerge if and when the cash infusion into Lippo Karawaci from its potential divestment of stake in First Reit and its manager could be used to pay outstanding rental owed to First Reit," she said.

"While outlook has improved for First Reit's receivables from a potential positive spillover effect into rentals owed by Lippo Karawaci, it remains to be seen if there could be any marked improvement in the near-term given that the transaction is still pending the relevant approvals."

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