Monday, August 27, 2007

First REIT (AW9U.SI) - Ignored Value

First REIT was the first healthcare REIT listed on the Singapore Exchange. Most of its assets are housed in Indonesia (mainly the Siloam Hospital group). Meanwhile, the REIT has been acquiring some hospital assets in Singapore, most recently the Adam Road Hospital. First REIT is one of two healthcare REITs listed on SGX, the other being the recently listed Parkway Life REIT.

This research note considers First REIT a reasonable addition to an investor's portfolio at around $0.75 or less.

Reasonable Competitive Position

The Siloam group of hospitals is one of the main hospital groups in Indonesia. Indonesia might not be the most attractive destination for medical tourists seeking for top quality healthcare. Nevertheless, people still fall ill and need to find care. Amongst the second tier healthcare market serving Indonesia, Siloam is the leading hospital group. The Siloam hospital group was first established in 1996, through joint efforts of PT. Lippoland Development Tbk and Singapore based Gleneagles Development Healthcare Ltd. The partnership with a credible healthcare player (Parkway) and one of the biggest property management groups in Indonesia (Lippo) should ensure that there is reasonably strong competitive strength and quality healthcare provided by the Siloam Hospital group. Furthermore, the acquisitions of Singapore-based healthcare properties should maintain the quality of the First REIT healthcare assets.

Financial & Profitability Analysis


First REIT Parkway Life REIT
Revenues (FY est.) $24,896 $45,000
Operating Profit (Persistent) $22,024 $36,930
Net Profit (Persistent) $17,080 $33,110
Total Assets $306,660 $786,735
Total Liabilities $67,582 $36,420
Equity $239,078 $750,315
Liab/Assets 22.04% 4.63%
ROE 7.14% 4.41%
ROA 5.57% 4.21%
Operating Margin 88.46% 82.07%
Net Margin(Persistent) 68.61% 73.58%
CFO/PBT NA NA
Earnings Growth y-o-y

Shares Outstanding ('000)
601669
EPS/Payout Estimate $0.065 $0.061
NAV $0.88 $1.25
Stock Price $0.75 $1.20
P/E 11.54 19.80
P/B 0.85 0.96
Yield 8.67% 5.05%

The table above shows key comparative ratios for the two healthcare REITs listed on the Singapore Exchange. As can be seen, First REIT is yielding a very respectable 8.57% based on a stock price of $0.75. Taking into consideration that the REIT is still quite conservatively leveraged (Liab/Assets = 22.04%), this means that there is still room for the REIT to squeeze out higher returns on shareholders’ funds by taking up leverage to acquire hospital properties.

Furthermore, the REIT seems to be returning a respectable return on assets of 5.57%. Compared to Parkway which is projected to return 4.21%, this is surprising because one would expect a premium collection of hospitals like Mount Elizabeth and Gleneagles to squeeze out a higher return than a supposedly 2nd tier group of hospitals like the Siloam group. The operating margin of Siloam 88% is also higher than the projected Parkway numbers 82% (operating margins are calculated while excluding finance costs). If anything, this demonstrates that Siloam is able to manage their hospitals effectively and efficiently.

Valuation & Evaluation

At 8.67% yield, First REIT is quite attractive compared to its REIT peers. Other REITs seem to be yielding somewhere in the region of 5%. Furthermore, this yield is created using reasonable leverage. It appears that First REIT is unfairly punished due to the recent subprime sell-down and the perceptions that Indonesia might be a poor healthcare destination.

First REIT looks like a good buy at around $0.75.

For a research note on Parkway Life REIT, click here.

1 comment:

moouse21 said...

A good effort.

However, for First REIT you might want to take a look at the implied forex risk from the viewpoint of a Singapore domiciled investor. For example, you can probably get much better than the 8.67% yield if you could take your S$, convert to rupiah and take a one year FD in Jakarta. But you would worry about the rupiah devaluing.

If you think the rupiah will be stable, your investment in First REIT, allows you an easy way to tap the higher interest rate prevailing in Indonesia.