First REIT First s Impression Lasts First REIT s Three Hospitals: We visited First REIT s three Indonesian hospitals and also its hotel a week ago. Our objective was to gain better insights into the REIT s Indonesian assets and also Siloam Hospitals Group s (Siloam) hospital operations. Siloam is a division of PT Lippo Karawaci Tbk (Lippo) the sponsor of First REIT. Lippo is the largest listed broad-based property company in Indonesia and Siloam is a general hospital that targets mainly the mid to high income earner as their customer. It was important not only to see the assets but also understand the hospital operations as First REIT s rental from its Indonesian assets includes a variable component calculated based on a percentage of the growth of the gross revenue of the master lessee s gross revenue from these assets 1. We were impressed by what we have seen. The hospitals are well maintained and modern and its equipments are new and up to date. Most importantly, its medical staffs are competent and dedicated. Figure 1: Siloam Hospital Lippo Village Invest Intrinsic Value Current Price Report Snapshot S$1.000 S$0.705 We were impressed by what we have seen during our visit to the three First REIT s Indonesian hospitals. This further affirms our view that investors higher risk premium on First REIT as compared to PLife is fuelled mainly by fear which is unnecessary. For wise investors, this unnecessary risk premium presents an opportunity to make good returns from this good and stable REIT. Financial Highlights (Y/E Dec/Dec) FY07 FY08 FY09F Revenue (S$m) 26.67 29.96 30.01 Net Prop. Income 26.45 29.75 29.81 Earnings 18.33 20.83 19.39 DPS (Scts) 6.73 7.62 7.08 Source: Bloomberg, SIAS Research Key ratios (FY09F) Yield (%) 12.53 P/BV (x) 0.6 Net gearing (%) 15.86 Current ratio (x) 1.85 Source: SIAS Research 11 Nov 09 1-Year Price Volume Chart Source: Company (Prospectus) 1 Refer to First REIT s prospectus dated 4 Dec 06 1 Source: Bloomberg 52wks High-Low S$0.735/0.370 Number of Shares 274.474m Market Capitalization S$194.2m Analyst: Roger Tan roger@siasresearch.com Tel: 6227 2107
A Hospital Inside Lippo Village: Siloam Hospitals Lippo Village is the flagship hospital of Siloam Hospitals Group. Lippo village, located in Tangerang, is a township developed by Lippo. At only 8km from Soekarno-Hatta International Airport, the township alone has a population of over 40,000. This township can be considered a high end township and therefore its inhabitants are mostly middle to high income earners. Though the hospital has a sizeable demand from the township itself, it does not solely serve the town s inhabitants. They also treat foreign patients who are working around the vicinity and also the 1.37m population in Tangerang. Well Equipped Hospital: The Lippo Village hospital has a full bed capacity of 250 beds and is also equipped with state-of-the-art technology such as the Dual-Source Computer Tomography (DSCT) Scan. CT scans help doctors to diagnose heart issues but the older CT scans require patients to hold their breath for about 20sec for the scan to be clear. Older CT scans also take a long time to complete the scanning process. The DSCT scan requires patients to hold their breath for a shorter period and could complete the scanning process a lot faster. There are only three such DCST scans in Indonesia and Siloam owns two of them. The other DCST scan is in the Siloam Hospital in West Jakarta. Improving the Atmosphere: Siloam s management believes that they should brighten up the hospital s atmosphere so as to help lighten up the hearts of its patients and visitors. To reduce the gloom in the lobby area, Siloam incorporated a relaxing waiting and resting area and also brought in Starbucks. The lobby area feels familiar almost like the lobby of Tan Tock Seng Hospital. People Still Most Important: Siloam recognizes that the most important component in a good hospital is still its people nurses, administrator, and most importantly doctors. The hospital has therefore put much effort into the hiring, training and retaining of doctors and nurses to continuously improve the quality of its medical services. It has also been upgrading its medical equipments which not only enhances the doctor s diagnostic and Figure 2: How a CT Scan Looks Like Source: http://www.topnews.in/files/ct-scan.jpg Figure 3: Waiting/Rest Area in the Lobby Source: SIAS Research Figure 4: Starbucks in Some Siloam Hospitals Source: Siloam Hospital Group 2
treatment skills but is also a factor that encourages doctors to continue practice in the hospital. Some of Siloam s renowned doctors include neurosurgeon Dr Eka J. Wahjoeprahmono known for his ability to remove tumors on brainstem, he is also the Dean of the UPH Faculty of Medicine - and Dr F.X. Marseno a well known paediatric pulmonologist in the West Jakarta hospital. Figure 5: Dr Jongky who has been with Siloam for more than 20 years. Gaining Awards to Instill Confidence: To further boast public confidence over the quality of Siloam s medical services, the hospital has also worked hard to gain an international accreditation from the Joint Commission International (JCI). JCI was established in 1997 as a division of Joint Commission Resources, Inc. (JCR), a private, notfor-profit affiliate of The Joint Commission. Its mission was To continuously improve the safety and quality of care in the international community through the provision of education and consultation services and international accreditation and certification 2. Source: Company Figure 6: JCI Quality Approval JCI extends The Joint Commission s mission worldwide by assisting international health care organizations, public health agencies, health ministries and others to improve the quality and safety of patient care in more than 80 countries. Siloam Hospital Lippo Village (which was formerly known as Siloam Hospital Lippo Karawaci) is the first Indonesian hospital to gain this international accreditation. Siloam is currently also working on accrediting its West Jakarta hospital and in time the other hospitals as well. This is a good show of Siloam management s commitment to provide quality medical care to their patients. Source: Siloam Hospital Group Lower Cost Can Lead to Growth in Regional Medical Tourism: With international accreditation, renowned doctors, up to date medical equipment and well maintained infrastructure, Siloam could potentially extend their services to the South-East Asian region through medical tourism. At the moment, Siloam could provide CT and MRI scans at 2 Joint Commission website at www.jointcommission.org 3
a fraction of what Singapore hospitals charge. This means that Singaporeans could potentially go to Siloam to get a scan and bring the results back to Singapore for diagnosis and treatment. Common Principles in Other Two Hospitals: The other two hospitals we visited West Jakarta and Surabaya also operate under the same principles as Lippo Village hospital as discussed above. However, Surabaya hospital being the smallest of the three hospitals did seem a little stretched with a good growing demand. We were informed that Silaom is currently working on expanding the capacity of the hospital. Siloam Hospitals Good Pipeline: Siloam has a good pipeline of new hospitals coming on line over the next few years. One impressive upcoming hospital is the Siloam Hospitals Semanggi and Mochtar Riady Comprehensive Cancer Centre located in Central Jakarta. This will be Indonesia s first private comprehensive cancer treatment centre with state-of-the-art equipment. Siloam will also be opening hospitals in a few more areas such as Medan, Bandung, and Kemang over the next few years. All these are potential pipeline assets for First REIT. Lippo s Stability and Siloam s Reputation are Main Strength but also Risk of First REIT: Though, we feel that investors should not be overly concerned with the political risk of Indonesia, we must highlight that First REIT s risk would come mainly from Lippo s financial stability and Siloam s ability to manage its operational risk. Figure 7: Regional Population Region Figure 8: Cikarang Hospital in West Jakarta Not in First REIT Source: Siloam Figure 9: Pipeline Project Population (mil) West Jakarta 2.1 Tangerang 1.37 Surabaya 2.37 Source: Company Though First REIT s portfolio contains Singapore assets, these assets form only 17% of the total value of its portfolio. To minimize operational risk, First REIT s CEO Dr Ronnie Tan spends time every month to sit in Siloam s monthly management meetings as observer. Dr Tan had been a medical practitioner and was also the CEO of many hospitals including Gleneagles Hospital. We do not sense any immediate concerns over these two risks at the moment but we will continue to look out for any signs of weakness. 4 Source: Siloam
Recommendation: We maintain our view that First REIT is a good defensive income generator but investors are still reluctant to reduce the unnecessarily high risk premium simply because they are wary of the Indonesian assets. As mentioned at the beginning of the report, we are impressed by the hospital s well maintained infrastructure, up to date equipment and competent and dedicated doctors and staff. We conclude that First REIT s Indonesian assets are of good quality and the operations are well run by Siloam. We believe that investors fear of First REIT s assets is fuelled more by ignorance than anything else. We still believe that First REIT s valuation should not be far from that of P-Life REIT and at a dividend yield of over 10.7%, it is definitely a better substitute. We maintain our value of the REIT at S$1.00. Investors should be reminded that this valuation has not included the possible DPU growth from First REIT s arrangement with its tenants which allows the REIT to take a certain percentage cut from its tenant s financial performance past certain threshold. Maintain Invest 3 with fair value of $1.00. (Roger Tan). Figure 9: Yield Comparison Source: Company 3 We have changed our investment call system as at 1 Oct 09 5
Financial Table and Ratios (Y/E Dec) FY07 FY08 FY09F FY10F Profit & Loss (S$ m) Gross Revenue 26.67* 29.96* 30.01 30.35 Net Property Income 26.45* 29.75* 29.81 30.16 Distributable Earnings 18.33 20.83 19.39 19.67 Distribution Per share (S cents) 6.73 7.62 7.08 7.15 Balance Sheet (S$ m) FY07 FY08 FY09F FY10F Current Assets 15.27 14.65 17.04 20.25 Investment Properties 325.60 324.90 323.28 321.66 Current Liabilities 11.87 61.36 9.22 9.20 Borrowings 50.63 50.77 51.28 51.28 Unit holder s Funds 251.34 255.10 256.72 258.34 Cash Flow (S$ m) FY07 FY08 FY09F FY10F Operating Cash Flow 24.04 20.64 24.03 25.71 Investing Cash Flow -51.61 0.26 0.00 0.00 Financing Cash Flow 35.04-22.09-21.69-22.49 Financial Ratios FY07 FY08 FY09F FY10F Gross Revenue Growth (%) N.A 12.35 0.15 1.15 Net Property Income Growth (%) N.A 12.48 0.22 1.15 Distributable Earnings Growth (%) N.A 13.66-6.93 1.45 Distribution Growth (%) N.A 13.22-7.12 1.03 Net Distributable Margin (%) 68.72 69.52 64.60 64.79 Current Ratio (x) 1.29 0.24 1.85 2.20 Book Value per Share (S$) 0.93 0.94 0.94 0.94 Interest Coverage Ratio 14.46 12.24 7.48 7.54 Net Debt / Equity (%) 15.55 15.63 15.86 15.94 Return on Equity (%) 7.00 7.73 7.06 7.12 Return on Asset (%) 5.16 5.81 5.32 5.38 Valuations FY07 FY08 FY09F FY10F Price to book (x) 0.61 0.60 0.60 0.60 Distribution Yield (%) 11.91 13.49 12.53 12.66 *Adjusted by excluding interest income, to be comparable to 1Q09 revenue representation method. Source: Company, SIAS Research 6
About the Company First REIT is Singapore s first healthcare real estate investment trust that aims to invest in a diversified portfolio of income-producing real estate and / or real estate-related assets in Asia that are primarily used for healthcare and / or healthcare-related purposes. Managed by Bowsprit Capital Corporation Limited, First REIT s portfolio consists of eight properties located in Singapore and Indonesia, namely, 1) Adam Road Hospital, 2) The Lentor Residence, 3) Pacific Healthcare Nursing Home @ Bukit Merah, 4) Pacific Healthcare Nursing Home @ Senja, 5) Siloam Hospitals Lippo Village, 6) Siloam Hospitals West Jakarta, 7) Siloam Hospitals Surabaya, and 8) Imperial Aryaduta Hotel & Country Club. Price and Volume Chart Since IPO Source: Bloomberg 7
Appendix 1: First REIT s Assets (Source: Company) 8
DISCLAIMER SIAS Research Pte Ltd received compensation for conducting this valuation research. The estimated fair value of the stock is statement of opinion, and not statement of fact or recommendation on the stock. As of the date of the report, the analyst and his immediate family may hold positions in the securities recommended in this report. This research report is based on information, which we believe to be reliable. Any opinions expressed reflect our judgment at report date and are subject to change without notice. This research material is for information only. It does not have regards to the specific investment objectives, financial situation and the particular needs of any specific person who may receive or access this research material. It is not to be construed as an offer, or solicitation of an offer to sell or buy securities referred herein. The use of this material does not absolve you of your responsibility for your own investment decisions. We accept no liability for any direct or indirect loss arising from the use of this research material. We, our associates, directors and/or employees may have an interest in the securities and/or companies mentioned herein. This research material may not be reproduced, distributed or published for any purpose by anyone without our specific prior consent. 9