First Reit

First Reit Buy

May 28 close: S$1.36

Fair value: S$1.48

OCBC Investment Research, May 25

S&P has downgraded the credit rating of First Reit's sponsor, PT Lippo Karawaci (LK), with negative outlook, citing concerns about the company's thin liquidity buffer, especially in the face of substantial interest servicing needs.

First Reit's recent results provide a glimpse of the downstream implication, as the level of receivables has been rising over the last few quarters, though this has not impacted its ability to pay out regular distribution per unit (DPU).

While there remains a possibility of LK trimming its 28.1 per cent stake in First Reit, which in itself is already a reduced stake from its 30.94 per cent ownership back in end-FY17, we think that this is unlikely to go below 25 per cent.

First Reit recently entered into a S$100 million unsecured term loan that was intended to refinance its S$100 million 4.125 per cent fixed rate notes due on May 22, 2018.

We believe management has taken this approach to give sufficient time for uncertainties to clear up before dipping back into the bond market again. We remain cautiously optimistic that the balance of probabilities should remain in First Reit's favour, and retain our fair value estimate of S$1.48.

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