Impressive Assets on Hand
Intrinsic Value S$1.44
Prev Closing Price S$1.09
We were left impressed following our recent visit to five of First Real Estate Investment Trust (First REIT) assets due to the following factors: 1) all the assets are strategically located along key toll roads or in the middle of the CBD for easy accessibility, 2) assets with longer operating history are properly maintained and have utilization rates of 75+% which suggest the possibility of AEI and hence higher future DPU and 3) newer hospitals were equipped with high-end machines from Philips, Siemens and Varian. Their buildings are also network integrated and are capable of sending information across different levels and departments. Such facilities are seldom seen in Indonesia.
Over the last few months, there was some concern over the depreciating rupiah and economic turbulence but we reckon that the impact is minimal given their S$ based rental structure and defensive nature. Measures were also adopted recently to lower their floating bond exposure and extend their loan duration. Nonetheless, we increased our cost of equity slightly to 7% to account for these concerns but upped our terminal growth rate to 1.75% in view of higher future DPU. First REIT now trades at FY14 dividend yield of 7.0%. Recommend Increase Exposure with an intrinsic value of S$1.44.
Hospitals are strategically located: We noted that each of the hospitals are strategically positioned, with SHLV catering to the Lippo Village community, SHTS being a high end hospital that services the south Jakarta area, MRCCC being a high-end hospital that services the central Jakarta area and particularly dedicated cancer treatment and lastly, SHKJ being a general hospital that services the western Jakarta area. This setting also led to SHTS and MRCCC having a slightly more premium “impression”, partially because they are newer. We like this positioning as it sets an identity to each of the hospitals and their respective types of target patients.
Info on the site visit: The five assets that we visited were namely 1) Siloam Hospitals Lippo Village (SHLV), 2) Imperial Aryaduta Hotel &Country Club (IAHC), 3) Siloam Hospitals TB Simatupang (SHTS), 4) Mochtar Riady Comprehensive Cancer Centre (MRCCC) and lastly, 5) Siloam Hospitals Kebon Jeruk (SHKJ). These assets are located relatively close to central Jakarta, especially MRCCC, KJ and TS - though travelling can be a hassle especially during peak hours. All the assets are strategically located along key toll roads or in the middle of the CBD for easy accessibility. The sites are also well scattered to capture as many patients as possible.
SHLV: The first site that we visited is the SHLV, which is located in the west of Jakarta, along the toll road linking Jakarta to Merak, and within the Lippo village. The village is a planned township project that started in 1990, with the concept of a neighborhood in Singapore like Sengkang and Punggol. SHLV is Siloam’s first and co-flagship hospital.
This hospital has about 250 beds and services about 850+ outpatient patients and 60 emergency cases daily. It is equipped with five operating theatres and advance equipment like CT scan, MRI and others. One more inpatient ward will be open to cater to the demand – the utilization rate now is approximately 85%. About 60% of the wards are first class and above. A new wing was recently built to cater to the government subsidized patients. The site also has a helipad and is capable of providing medivac services within Indonesia and towards Singapore. We like the view of the VIP ward at level 10, which has a bird’s-eye view of the Lippo Village and cost roughly Rup 2.5m per night.
IAHC: This hotel and country club is situated five minutes away from SHLV and mainly services the MNCs that are situated around the area. There are 192 available rooms/villas with a utilization rate of 80+%. The country club has about 1,100 members. The asset’s exterior is well furnished and we were impressed with the presidential suite, which cost about Rup2.5-4m per night. This asset has a lot of idle land space and makes it a good candidate for some AEI works, especially when the hotel rooms are highly utilized.
SHTS: Located along the Jakarta outer ring toll road, this hospital exhibits a strong corporate impression at the entrance, such that we thought it was an office building instead of a hospital. SHTS is Siloam’s newest hospital and has some of the most advanced equipment in Indonesia, like 3 Tesla MRI, 256 slice CT-scan, Cathlab, linear accelerator for radiotherapy and state of the art monitoring system. Another thing to note is that the entire building’s network is integrated and as such, medical results from different levels can be sent to the inpatient wards or outpatient units instantly. We are also much mesmerized by the grand and premium ambience of the building.
The asset was officially operational in July 2013 and is approximately 40-50% occupied (based on the 40 beds that are in use). It can hold up to 171 beds for now and new beds will be open every 1-2 months. This hospital is expect to attain breakeven level by 1H 2014
MRCCC: Contrary to SHTS, MRCCC gives a retail mall feel on the first impression. We believe the management structured the hospital this way to generate a more positive atmosphere to patients. The building has 30 storeys and is located at the CBD of Jakarta. It is also the first private cancer hospital in Indonesia. It handles about 250 outpatients and 100 inpatients daily – of which approximately 30% are cancer patients. MRCCC can hold up to 300 beds and wards will be opened progressively as utilization rate picks up. Currently, the hospital has 150 doctors, of whom 75 are exclusive and only practice in Siloam Hospitals.
SHKJ: Finally, our last hospital is a general hospital which is relatively more crowded and noisier than the prior three. It has similar facilities as the rest, though the specs are more backward. Similar to SHLV, SHKJ is located along the Jakarta-Merak toll road and has approximately 20 years of history. It has a center of Excellence in Urology and 24 hour international standard trauma center (same as SHLV). When we were at the hospital, all the VIP wards were occupied (there were still a few suites available) and utilization rate was around 75+%. This site looks poised for some AEI work given its high traffic flow and timeworn facilities. At the site, we also saw a nurse educating the public on the proper procedure of cardiopulmonary resuscitation (CPR).
Conclusion: On the whole, we are quite impressed with First REIT’s assets, particularly their locations and facilities. The buildings are well maintained (even for SHKJ which is 20 years old) and the medical machines are of high-end standard from brands such as Philips, Siemens and Varian. Also, the utilization rates of the hospitals are pretty high and some of the assets have huge land space and room for AEI, suggesting higher future DPU. Over the last few months, there was some concern over the depreciating rupiah/S$ rate and economic turbulence but we reckon that the impact is insignificant given their S$ based rental structure and defensive nature. First REIT now trades at a FY14F DPU of 7.0%. We now adjust our cost of equity slightly upward to 7% to account for the concerns but upped our terminal growth rate to 1.75% in view for higher future DPU. Recommend Increase Exposure with an intrinsic value of S$1.44.
Publish date: 24/09/13