FirstREIT – ML

Initiating with a Buy rating, PO of S$0.88/share
We are initiating coverage on First REIT with a Buy rating and a 12-month price objective of S$0.88/share, which implies a total return of 25%. Our price objective is based on a 5% premium to our DCF valuation, which is calculated using a discount rate of 11.3%. Further upside could come from acquisition growth.

Healthcare focus
First REIT is the only Singapore REIT (S-REIT) focusing on the Asian healthcare industry. We are positive on the outlook for the Asian healthcare industry. The strong fundamentals reflect rising disposable income, growth in elective surgeries, rising new investment, and the need for REITs to assist industry growth.

Strong acquisition pipeline
We believe First REIT is in a strong position to double its IPO investment portfolio from S$257mn to over S$500mn in the next three years. First REIT has a conservative gearing level, and can benefit from sponsor Lippo Karawaci’s regional contacts in the healthcare industry.

Investment risks
A sustained downturn in hospital operations, which may reduce the ability of Lippo Karawaci (87% tenant) to pay rental commitments to First REIT. Any deterioration in the Indonesian economic environment may also restrict the ability of special purpose companies domiciled in Indonesia to repatriate funds to Singapore.