Analysts at DBS Group Research and OCBC Investment Research (OIR) are keeping “buy” on First REIT with lower target price and fair value of 29 cents and 28 cents respectively.
For its 1QFY2024 ended March, First REIT’s results missed OIR analyst Ada Lim’s expectations due to foreign exchange (FX) headwinds. Its rental income and net property income (NPI) declined by 2.7% and 2.1% y-o-y respectively, largely due to Singapore dollar (SGD) appreciation against Indonesian Rupiah (IDR) and Japanese yen (JPY).
“In local currency terms, however, we note that underlying asset performance remained healthy. 1QFY2024 rental income from assets in Indonesia and Singapore grew by 4.5% and 2% y-o-y to IDR179.3 billion and $1.08 million, respectively, while rental income from Japan remained stable at JPY37.7 million,” Lim points out.
Coupled with higher financing costs, distributable income for the quarter slipped 2.2% to $12.4 million, while distribution per unit (DPU) dropped by a larger 3.2% due to an enlarged unit base to 0.60 cents — representing 24% of OIR’s initial forecast.
DBS analysts Elizabelle Pang, Rachel Tan and Derek Tan notes that further weakening in IDR and JPY against SGD could pose headwinds to First REIT’s gross rental income and share price. They also watch for rentals outstanding from MPU, which remains an overhang.
“On a positive note, the long-awaited divestment of its non-core asset such as Imperial Aryaduta Hotel & Country Club remains a key asset recycling activity and can act as a positive catalyst for First REIT, with capital to potentially be used to fund acquisitions in developed markets,” they highlight.
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DBS also believes that First REIT’s long-term growth outlook is robust, given nascent aged care markets in Asia as well as growing healthcare demand from Indonesia, with healthcare spending per capita in Indonesia forecasted to grow by 37% CAGR by 2028.
Moving forward, OIR expects the Monetary Authority of Singapore to maintain the prevailing Singapore dollar nominal effective exchange rate ($NEER) policy, which could contribute to further SGD strength this year. Bank Indonesia has raised its benchmark interest rate by 25 basis points to a record high of 6.25%, while Bank of Japan does not appear to be in a rush to hike rates after exiting from its negative interest rate policy, Lim adds.
Taking into consideration FX volatility, OIR has adjusted its forecast and trimmed its FY2024 and FY2025 DPU estimates by 4% and 3.8% respectively.
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Similarly, DBS has trimmed its FY2024-FY2026 DPU estimates by 5%-6% using more conservative IDR and JPY rates against the SGD.
As at 12.23pm, units in First REIT are trading at an unchanged 25.5 cents.
