1. Lippo Karawaci – Rating upgrade to B3 by Moody, Outlook changed from negative to neutral
2. Revamp in leadership – John Raidy becomes CEO & Surya Tatang becomes CFO
3. Secured US$1.01 billion from rights issue and asset divestment
- $730 million rights issue from the Riady family
(expected to complete during first half of 2019)
- $280 million from divesting Lippo Mall Puri to Lippo Malls Indonesia Retail Trust
(expected to complete during second half of 2019)
4. The proceeds of $1.01 billion are intended to be allocated as follows:
- $275 million for debt reduction
- $315 million for payment of rental obligations to REITs
- $100 million for construction of existing projects
- $200 million to support development of its Meikarta project
- $120 million for costs and funding related to sale of Lippo Mall Puri
5. First REIT’s account receivables has been increasing significantly over the past 10 years. AR as of 31 Dec 18 stands at approximately $27 million. $315 million proceeds raised from Lippo Karawaci is allocated towards payment of rental obligations to REITs. The amount is believed to be more than sufficient to tackle First REIT’s AR concerns.
First REIT’s Account Receivables in millions (SGD)
6. Relative Valuation: First REIT’s P/B ratio is at its 8-year low. The P/B ratio of First REIT as at 18 March 2019 is 0.91x. This is below the 8-year average of 1.20x and the last time we see P/B ratio of 0.9 is around 2011-2012.
First REIT’s P/B Ratio over 8-year time frame
7. Absolute Valuation (Dividend Discount Model): A 15-year time frame is used as an assumption in calculating the fair value of First REIT. Discount rate using CAPM is computed to be 5.24% and compounded annual growth rate is 1.91%. Dividends for next period is 8.76 cents and multiple for DDM is 11.99. Hence, the fair value estimation for First REIT as at 31 March 2019 is approximately $1.05 cents. (Refer to assumptions below)
Discount Rate = 2.2% + 0.51(5.96%) = 5.24%
Dividend for next period = (2.15 x 4) x 1.91% = 8.76 cents
10-year Risk Free Rate = 2.2%
Market Risk Premium = 5.96% Reference
5-year Beta = 0.51
Compounded Annual Growth Rate over 10 years = 1.91%
8. Liquidity Analysis:
EBIT / Interest expense is 5.3x
Gearing ratio stands at 35%
Weighted-average cost of debt is 3.84%
59% of total debt is hedged to fixed interest rates
Current & Quick Ratio < 0.5
$100 mil Fixed Rate Notes maturing in May 2019 (Refinancing Risk)
First REIT has a cash balance of $27.8 mil as @ 31 Dec 2018
9. Indonesia has a population size of 269 million people making it the 4th largest population in the world. Indonesia is one of the fastest growing economy (average 5.3% GDP growth) and it has the largest economy in Southeast Asia. A large domestic population, coupled with the emergence of a rising middle class could boost domestic spending significantly and propel Indonesia’s economic growth in the next decade.
10. Demand for healthcare in Indonesia is expected to increase as there are only 3 doctors available for 10,000 people, far below the global average of 14 doctors. Projected healthcare spending in Asia-Pacific is expected to hit US$2.3 trillion by 2026. Reasons can be attributed to higher population growth, ageing population, rising healthcare costs and rising incidence of chronic diseases.
Lippo Karawaci has a healthy pipeline of healthcare hospitals operated by Siloam. OUE Lippo healthcare has 12 nursing homes located in Japan and a Hospital in China’s Jiangsu province. OUELH is looking to expand its healthcare network across Pan-Asia and First REIT is never short of acquisition opportunities from both sponsors.
Conclusion: Apart from the rosy macro economic outlook of healthcare in Asia-pacific, liquidity risks still lurks around First REIT and its parent, Lippo Karawaci. Rupiah has been weakening against the USD and Bank of Indonesia has hiked rate 6 times in 2018 to stabilize the Rupiah. No doubt Lippo Karawaci is facing trouble paying off its US-denominated debt and this presents a counter party risk for First REIT.
But taking a step back, Lippo Karawaci is the largest listed property developer in Indonesia and its backed by the billionaire Riady family. Cash flow issues would not persist long as it can easily divest its properties or inject fresh fund from Riady (which is exactly what they did). Hence, while analysts are downgrading and institutions are selling, this might be a good opportunity to adopt the contrarian approach. I have taken some positions. First REIT last traded price at $1 gives a dividend yield of 8.65%. Please do your own research.