Lippo Malls Indonesia Retail Trust

OCBC on 8 June 2015

Indonesia’s retail sales momentum remained solid, increasing 23.6% YoY in Apr, despite some uncertainties over its economic outlook. Lippo Malls Indonesia Retail Trust’s (LMIRT) recent 1Q15 results has reflected this positive retail sales trend, as its gross revenue and DPU grew 24.7% and 16.2% YoY to S$42.0m and 0.79 S cents, respectively. LMIRT has ample opportunities for inorganic growth ahead, as its sponsor Lippo Karawaci currently has 15 malls in the pipeline. Looking ahead, LMIRT believes the prospects for quality retail spaces in Indonesia remains bright over the next 12 months. Meanwhile, management has sought to reduce risks for unitholders, having hedged ~93% of its estimated net cash flows in IDR for the next two years. 100% of its borrowings are also on a fixed rate basis or hedged with interest rate swaps. We make no changes to our forecasts, HOLD rating and S$0.35 fair value estimate.

Indonesia’s retail sales momentum still solid
Despite some uncertainties over Indonesia’s economic outlook, the retail sales momentum remained solid, increasing 23.6% YoY in Apr, after growth of 10.9%-19.3% in Jan to Mar. Lippo Malls Indonesia Retail Trust’s (LMIRT) recent 1Q15 results has reflected this positive retail sales trend, as its gross revenue and DPU grew 24.7% and 16.2% YoY to S$42.0m and 0.79 S cents, respectively. In addition, rental reversions remained robust, coming in at 9.5%, while portfolio occupancy stood at 94.2%. LMIRT has ample opportunities for inorganic growth ahead, as its sponsor Lippo Karawaci currently has 15 malls in the pipeline. Lippo Karawaci has plans to expedite the development of its pipeline projects as well as asset enhancement projects in existing malls. 

Prudent capital management in place
Looking ahead, LMIRT believes the prospects for quality retail spaces in Indonesia remains bright over the next 12 months, as both local and foreign retail players are still active. The average asking base rent in greater Jakarta rose 4.4% YoY to IDR315,898 psm per month in 1Q15, and Colliers International expects the asking base rent to increase on a full-year basis. Out of LMIRT’s 17 retail malls, 10 are located in greater Jakarta. Meanwhile, management has sought to reduce risks for unitholders, having hedged ~93% of its estimated net cash flows in IDR for the next two years. 100% of its borrowings are also on a fixed rate basis or hedged with interest rate swaps. With ~S$200m of debt maturing in Jul this year, LMIRT is in the process of refinancing this with either a term loan or fixed rate note issuance. Cost of debt is expected to remain stable.

Maintain HOLD
We make no changes to our forecasts, HOLD rating and S$0.35 fair value estimate. LMIRT is currently trading at FY15F P/B ratio of 0.86x and offers a distribution yield of 8.2%. The former is approximately one standard deviation above its 5-year forward mean of 0.77x, while the latter is in-line with its 5-year forward average of 8.1%.

Lippo Malls Indonesia Retail Trust

OCBC on 13 Feb 2015

Lippo Malls Indonesia Retail Trust (LMIRT) reported its 4Q14 results which met the street’s expectations. Gross revenue rose 6.2% YoY to S$36.0m due largely to positive rental reversions. DPU jumped 26.8% to 0.71 S cents. However, gross revenue and DPU for FY14 dipped 10.2% and 15.1% to S$137.0m and 2.76 S cents, respectively, underpinned by the weaker IDR versus the SGD and a lower NPI margin of 92.0% (FY13: 93.9%). During 4Q14 and FY14, LMIRT achieved healthy average rental reversions of 10.8% and 10.4%, respectively, aided by favourable demand and supply dynamics. Management has currently hedged ~67% of its estimated net cash flows. It plans to increase this hedge ratio to at least 90%. Following a change in analyst coverage and taking into account a larger unit base, we pare our FY15 DPU projection by 4.7%. Our DDM-derived fair value estimate is lowered from S$0.37 to S$0.35. Maintain HOLD.

4Q14 results within the street’s expectations
Lippo Malls Indonesia Retail Trust (LMIRT) reported its 4Q14 results which met the street’s expectations. Gross revenue rose 6.2% YoY to S$36.0m due largely to positive rental reversions. DPU jumped 26.8% to 0.71 S cents. However, gross revenue and DPU for FY14 dipped 10.2% and 15.1% to S$137.0m and 2.76 S cents, respectively, underpinned by the weaker IDR versus the SGD and a lower NPI margin of 92.0% (FY13: 93.9%). Full year revenue and DPU constituted 100% and 98.6% of Bloomberg consensus’ estimates, respectively. Based on its last closing price, LMIRT’s FY14 distribution yield was 7.8%. 

Robust rental reversions, but exposure to IDR remains
During 4Q14 and FY14, LMIRT achieved healthy average rental reversions of 10.8% and 10.4%, respectively, aided by favourable demand and supply dynamics. Looking ahead, LMIRT believes the outlook for quality retail spaces in Indonesia is promising in the next 12 months as both local and foreign retail players continue to remain active. Management has currently hedged ~67% of its estimated net cash flows. It plans to increase this hedge ratio to at least 90% and is also looking at putting in place hedges for two years instead of one, given the expected continued volatility in the IDR. 

Maintain HOLD
In terms of financial position, LMIRT’s gearing stood at 31.3% as at 31 Dec 2014. It has ~S$200m worth of debt maturing in Jul this year, and management is seeking to refinance this, likely with another bond issuance. LMIRT is hopeful of obtaining a lower interest rate for this refinancing exercise. Following a change in analyst coverage and taking into account a larger unit base, we pare our FY15 DPU projection by 4.7%. Our DDM-derived fair value estimate is lowered from S$0.37 to S$0.35. Although LMIRT offers a decent FY15F distribution yield of 8.5%, we are maintaining our HOLD rating as we see limited total returns ahead.

Lippo Malls Indonesia Retail Trust

OCBC on 7 May 2014

Lippo Malls Indonesia Retail Trust (LMIR Trust) reported 1Q14 DPU of 0.68 S cents, down 23.6% YoY. This is below market expectations, given that the quarterly distribution only met 18.7%/21.3% of our/consensus FY14 DPU forecasts. Nevertheless, on a sequential basis, DPU represents a 21.4% improvement, aided by hedging and capital management efforts by LMIR Trust. We understand that the currency hedges in place previously were only effective for ~15%-16% of the income. However, over 90% of the income is now covered with the new hedges, which should provide greater stability to LMIR Trust’s distribution going forward. Underlying portfolio performance, we note, has been encouraging thus far, with gross rental income in IDR terms growing 6.3% YoY and portfolio improving 1.8ppt YoY to 95.6% (4Q13: 95.0%). We now lower our fair value slightly from S$0.39 to S$0.37 to account for the weak results. Maintain HOLD.

1Q14 results missed expectations
Lippo Malls Indonesia Retail Trust (LMIR Trust) reported a dismal set of 1Q14 results, with gross revenue falling 14.5% YoY to S$33.7m and NPI down 16.6% YoY to S$31.1m. The soft performance was mainly due to the expiry of rental guarantee income from Pluit Village and a 15.8% depreciation of IDR against SGD. DPU for the quarter slipped 23.6% to 0.68 S cents, further dragged down by higher finance and other costs. This is below market expectations, given that the quarterly distribution only met 18.7%/21.3% of our/consensus FY14 DPU forecasts. Nevertheless, on a sequential basis, DPU represents a 21.4% improvement, aided by hedging and capital management efforts by LMIR Trust.

Fundamentals still sound
We understand that the currency hedges in place previously were only effective for ~15%-16% of the income. However, over 90% of the income is now covered with the new hedges, which should provide greater stability to LMIR Trust’s distribution going forward. Underlying portfolio performance, we note, has been encouraging thus far, with gross rental income in IDR terms growing 6.3% YoY and portfolio improving 1.8ppt YoY to 95.6% (4Q13: 95.0%). While there was a jump in property operating expenses (+46.2% YoY in IDR terms), we note that this was due to a change in the recognition of parking income (LMIR Trust now operates the mall car parks in-house rather than outsourcing to third-party). In addition, average rental reversion of 9.4% was achieved during the quarter.

Maintain HOLD
Over the quarter, LMIR Trust also repaid its S$147.5m term loan. As a result, gearing ratio improved from 34.3% registered in 4Q13 to 26.7%, with no refinancing needs until Jul 2015. With the stronger financial position, management said it is well positioned for future growth. We note that LMIR Trust is currently exploring at least one investment opportunity, and may potentially conclude a deal this year. However, pending any material development, we lower our fair value slightly from S$0.39 to S$0.37 to account for the weak results. Maintain HOLD.

Lippo Malls Indonesia Retail Trust

OCBC on 17 Feb 2014

LMIRT’s 4Q13 results were significantly below ours and the street’s expectations. FY13 DPU of 3.25 S cents formed only ~93% of ours and the street’s prior estimate. LMIRT reported 4Q13 gross rental income of S$33.9m, down 4.0% YoY, chiefly due to FX movements. Finance expenses jumped by 37.5% YoY to S$9.0m due to the S$150m note issued last Oct and the S$75m note issued in Nov 2012. The S$147.5m loan facility with all-in-cost of 6.77% p.a. that was set to mature in Jun 2014 was repaid in Jan. 4Q13 other losses was S$1.0m, versus S$0.2m a year ago, chiefly due to a realised loss on FX of S$1.4m. LMIRT’s NAV has fallen from S$0.4528 at end-Sep 2013 to S$0.4115 at end-Dec 2013. Adjusting our assumptions, including raising our cost of equity assumption from 10.1% to 10.6%, we reduce our FV from S$0.45 to S$0.39. Maintain HOLD.

4Q13 gross rental income contracts 4% 
LMIRT’s 4Q13 results were significantly below ours and the street’s expectations. FY13 DPU of 3.25 S cents formed only ~93% of ours and the street’s prior estimate. LMIRT reported 4Q13 gross rental income of S$33.9m, down 4.0% YoY. Net property income (NPI) was S$31.1m, down 5.5% YoY. 4Q13 average IDR/SGD rate depreciated 15.4% YoY, pulling down the results. In IDR-terms, 4Q13 gross rental income and NPI increased by 13.5% YoY and 11.7% YoY respectively. Distributable income fell by 14.6% YoY to S$13.8m and 4Q13 DPU contracted 24.3% YoY to 0.56 S cents (down 36% QoQ). LMIRT’s NAV has fallen from S$0.4528 at end-Sep 2013 to S$0.4115 at end-Dec 2013. For FY13, gross rental income rose by 16.5% YoY to S$153m, chiefly due to the six malls acquired in 4Q12. FY13 DPU is 10.2% higher YoY. 

Refinancing completed 
The S$147.5m loan facility with all-in-cost of 6.77% p.a. that was set to mature in Jun 2014 was repaid in Jan. Recap that a S$150m 4.25% fixed rate note was issued on 4 Oct 2013. It is scheduled to mature in Oct 2016. Finance expenses jumped in 4Q13 by 37.5% YoY to S$9.0m due to the note issued last Oct and the S$75m note issued in Nov 2012. 4Q13 other losses was S$1.0m, versus S$0.2m a year ago, mainly due to a realised loss on FX of S$1.4m.

Good occupancy
LMIRT's portfolio had an average occupancy of 95.0% as at end-Dec 2013. This is higher than the industry average of 81% (according to the 3Q13 Colliers report for retail properties in greater Jakarta). Weighted Average Lease to Expiry (by NLA) as at 31 Dec 2013 was 4.94 years. Average rental reversion for 4Q13 was 11.1%. 

Maintain HOLD
Adjusting our assumptions, including raising our cost of equity assumption from 10.1% to 10.6%, we reduce our FV from S$0.45 to S$0.39. Maintain HOLD. We estimate a FY14F yield of 9.2%.

Lippo Malls Indonesia Retail Trust

OCBC on 7 Nov 2013

LMIRT reported 3Q13 gross rental income of S$38.9m, up 13.6% YoY. The increase was mainly due to the acquisition of the six new malls in 4Q12, and positive rental reversions for the existing malls. Distributable income increased by 20.7% YoY to S$19.1m and DPU climbed 19.2% to 0.87 S cents. Results for the quarter were in-line with ours and consensus expectations. 9M13 DPU of 2.69 S cents forms 75% of our prior FY13 estimate. On 4 Oct, under its MTN programme, LMIRT issued S$150m 4.25% notes due 2016. Management indicates that it may use the money raised to refinance the S$147.5m term loan due Jun 2014 or to make acquisition. It currently has a potential target in mind. Adjusting our model slightly to incorporate higher finance expense from the S$150m notes issuance and lower cost of equity assumptions (9.7% instead of 10.8%), we raise our DDM-based FV to S$0.45 from S$0.44. Maintain HOLD. We estimate a FY13F yield of 7.8%.

3Q13 as expected
LMIRT reported 3Q13 gross rental income of S$38.9m, up 13.6% YoY. The increase was mainly due to the acquisition of the six new malls in 4Q12, and positive rental reversions for the existing malls. Distributable income increased by 20.7% YoY to S$19.1m and DPU climbed 19.2% to 0.87 S cents. Results for the quarter were in-line with ours and consensus expectations. 9M13 DPU of 2.69 S cents forms 75% of our FY13 estimate. Due to weakening of the IDR, NAV fell 20.1% QoQ to 45.28 S cents as of end 3Q13.

FX hedges in place
Management is looking to hedge 80-85% of distributable income using options, up from 65% earlier this year. A long-term forward-based hedge which expired in May was replaced with options, and management intends to do the same for another hedge which expires in the middle of this month. Compared to the average exchange rate over 3Q13, the SGD has strengthened 6.4% against the IDR for 4Q13 so far, with SGD1 buying an average of IDR8947 from 1 Oct to 6 Nov, compared to an average of IDR8410 over 3Q13 (Bloomberg).

S$150m notes issued in Oct
Gearing climbed from 24.2% in 2Q13 to 28.2% in 3Q13, chiefly due the fall in value of the investment properties in SGD terms. Management seeks to have an average gearing of 30% over the medium-term. On 4 Oct, LMIRT issued S$150m 4.25% notes due 2016. Management indicates that it may use the money raised to refinance the S$147.5m term loan due Jun 2014 or to make acquisition. It currently has a potential target in mind. Separately, management is speaking with a developer about developing an extension for Ekalokasari Plaza. Some tenants have not been renewed and others have been relocated, resulting in a drop in occupancy. Note that Ekalokasari accounts for only 3.6% of the portfolio by NLA.

Maintain HOLD
Adjusting our model slightly to incorporate higher finance expense from the S$150m notes issuance and lower cost of equity assumptions (9.7% instead of 10.8%), we raise our DDM-based FV to S$0.45 from S$0.44. Maintain HOLD. We estimate a FY13F yield of 7.8%.

Lippo Malls Indonesia Retail Trust

OCBC on 22 Aug 2013

The IDR has weakened some 7.4% against the SGD since 28 Jun, with SGD1 buying IDR8558.25 as at 21 Aug, compared to IDR7922.96 on 28 Jun (Bloomberg). We understand that only ~65% of the cash flow from the properties for 2H13 are likely hedged for depreciation of IDR against SGD. In addition, the weakening of the IDR against the SGD does not bode well for the valuation of LMIRT’s properties in SGD terms, which means that NAV would likely be affected negatively. To reflect a higher risk profile for LMRT, especially given the outflow of funds from emerging markets, we incorporate a higher cost of equity of 10.8%, versus 9.7% previously, and trim our DDM-based FV to S$0.44 from S$0.49. Maintain HOLD.

Concern over FX movement
The IDR has weakened some 7.4% against the SGD since 28 Jun, with SGD1 buying IDR8558.25 as at 21 Aug, compared to IDR7922.96 on 28 Jun (Bloomberg). We understand that only ~65% of the cash flow from the properties for 2H13 are likely hedged for depreciation of IDR against SGD. In addition, the weakening of the IDR against the SGD does not bode well for the valuation of LMIRT’s properties in SGD terms, which means that NAV would likely be affected negatively.

No surprises in 2Q13
To recap, LMIRT posted 2Q13 gross rental income of S$40.1m, up 30.2% YoY. The increase was mainly due to the acquisition of the six new malls in 4Q12, and positive rental reversions of 15.5% for the existing malls. Total revenue (equivalent to gross rental income in 2Q13) fell 12.5% YoY due to the inclusion of service charge and utilities recovery income from the malls’ operational activities in 2Q12. Such activities have been outsourced to a third party operating company with effect from 1 May 2012 and there is also a related decrease in expenses registered in 2Q13. Distributable income increased by 19.5% YoY to S$20.5m and DPU climbed 17.7% YoY to 0.93 S cents. Results for the quarter were in line with our expectations and consensus’. 1H13 DPU of 1.82 S cents forms 50.6% of our FY13 estimate of 3.6 S cents, which we maintain for now. 

Plans to acquire property this year
Gearing remains healthy at 24.2%. LMIRT may refinance the S$147.5m term loan due Jun 2014 as early as late 2013. Approximately 68% of LMIRT’s S$1.77b portfolio remains unencumbered, providing LMIRT with financial flexibility for future acquisitions. Management hopes to acquire at least one property this year. 

Maintain HOLD
To reflect a higher risk profile for LMRT’s unit price, especially given the outflow of funds from emerging markets, we incorporate a higher cost of equity of 10.8%, versus 9.7% previously, and trim our DDM-based FV to S$0.44 from S$0.49. MaintainHOLD. We estimate a FY13F yield of 7.9%.

Lippo Malls Indonesia Retail Trust

OCBC on 2 Aug 2013

LMIRT posted 2Q13 gross rental income of S$40.1m, up 30.2% YoY. The increase was mainly due to the acquisition of the six new malls in 4Q12, and positive rental reversions of 15.5% for the existing malls. Distributable income increased by 19.5% YoY to S$20.5m and DPU climbed 17.7% YoY to 0.93 S cents. Results for the quarter were in line with our expectations and consensus’. 1H13 DPU of 1.82 S cent forms 50.6% of our FY13 estimate. To reflect the recent sharp increase in the Indonesian 10-year risk-free rate, we trim our DDM-based FV to S$0.49 from S$0.52 and maintain our HOLD rating on LMIRT. We estimate a FY13F yield of 7.2%.

2Q13 in line
LMIRT posted 2Q13 gross rental income of S$40.1m, up 30.2% YoY. The increase was mainly due to the acquisition of the six new malls in 4Q12, and positive rental reversions of 15.5% for the existing malls. Total revenue (equivalent to gross rental income in 2Q13) fell 12.5% YoY due to the inclusion of service charge and utilities recovery income from the malls’ operational activities in 2Q12. Such activities have been outsourced to a third party operating company with effect from 1 May 2012 and there is also a related decrease in expenses registered in 2Q13. Distributable income increased by 19.5% YoY to S$20.5m and DPU climbed 17.7% YoY to 0.93 S cents. Results for the quarter were in line with our expectations and consensus’. 1H13 DPU of 1.82 S cent forms 50.6% of our FY13 estimate. 

Financial flexibility
Gearing remains healthy at 24.2%. LMIRT may refinance the S$147.5m term loan due June 2014 as early as late 2013. Approximately 68% of LMIRT’s S$1.77b portfolio remains unencumbered, providing LMIRT with financial flexibility for future acquisitions. Management hopes to acquire at least one property this year. We understand that ~65% of the cash flow from the properties for 2H13 should be hedged for depreciation of IDR against SGD. As at 30 Jun, overall occupancy was 95.1%, versus 93.8% as at 31 Mar 2013, and higher than the industry average of 85.7% (Colliers). Occupancy at Pluit Village increased to 86.7% from 75.5% (1Q13) because Carrefour reopened in June.

Maintain HOLD
To reflect the recent sharp increase in the Indonesian 10-year risk-free rate, we trim our DDM-based FV to S$0.49 from S$0.52 and maintain our HOLD rating on LMIRT. We estimate a FY13F yield of 7.2%.

Lippo Malls Indonesia Retail Trust

OCBC on 3 May 2013

LMIRT posted 1Q13 gross rental income of S$39.4m, up 29.3% YoY. The increase was mainly due to the acquisition of the six new malls in 4Q12, and positive rental reversions for the existing malls. The higher gross rental income was partially offset by the effect of FX rates used for translating into SGD revenues denominated in IDR. Results for the quarter were in line with our and consensus expectations; DPU of 0.89 S cent formed 25% of ours and 26% of the street's FY13 estimate. We maintain our fair value of S$0.52 and HOLD rating on LMIRT. We estimate a FY13F yield of 6.7%.

1Q13 in line
LMIRT posted 1Q13 gross rental income of S$39.4m, up 29.3% YoY. The increase was mainly due to the acquisition of the six new malls in 4Q12, and positive rental reversions for the existing malls. The higher gross rental income was partially offset by the effect of FX rates used for translating into SGD revenues denominated in IDR. Total revenue (equivalent to gross rental income in 1Q13) fell 13.6% YoY due to the inclusion of service charge and utilities recovery income from the malls operational activities in 1Q12. Such activities have been outsourced to a third party operating company with effect from 1 May 2012 and there is also a related decrease in expenses. Results for the quarter were in line with our and consensus expectations; DPU of 0.89 S cent (up 29% YoY) formed 25% of ours and 26% of the street's FY13 estimate.

Financial flexibility
Gearing remains healthy at 24.3%. In addition, ~68% of the S$1.77b portfolio, equivalent to S$1.2b, remains unencumbered, providing LMIRT with financial flexibility for future acquisitions. With the issue of a total of S$325m of SGD notes in Jul and Nov 2012, the average cost of debt of LMIRT has been reduced by ~1% point to 6%. As at 31 Mar, overall occupancy was 93.8%, versus 92.6% as at 31 Dec 2012, and higher than the industry average of 87.4% (Jones Lang Lasalle). According to management, the outlook for quality retail space is expected to remain positive in the next 12 months as both local and foreign retail players continue to be interested in the growing Indonesia retail market in 2013. 

Maintain HOLD
We maintain our fair value of S$0.52 and HOLD rating on LMIRT. We estimate a FY13F yield of 6.7%.

Lippo Malls Indonesia Retail Trust

OCBC on 13 Feb 2013

LMIRT posted 4Q12 gross rental income of S$33.0m, up 35% YoY. The increase was primarily due to the contributions from Pluit Village and Plaza Medan Fair (acquired in 4Q11) and marginal contributions from the six acquisitions made in 4Q12. Results for the quarter were generally in line with our expectations; DPU of 0.74 S cents formed 97% of our estimate. NAV per unit rose 6.3% QoQ to 56.16 S cents, giving a current P/B of 0.93x. Gearing remains healthy at 24.5%. Management indicates that the average weighted all-in cost of debt for FY13 is likely to be 5.5%-5.7%. We maintain our fair value of S$0.52. Since the current unit price is near our fair value, we downgrade LMIRT to a HOLD. We estimate a FY13F yield of 6.9%.

4Q12 in line
LMIRT posted 4Q12 gross rental income of S$33.0m, up 35% YoY. The increase was primarily due to the contributions from Pluit Village and Plaza Medan Fair (acquired in 4Q11) and marginal contributions from the six acquisitions made in 4Q12. Total revenue (equivalent to gross rental income in 4Q12) fell 11% YoY to S$33.0m. This is because of the absence of the service charge and utilities recovery following the outsourcing of the operational services to a third-party operating company with effect from 1 May 2012. Net property income margin was at 93.4%, down 3.2 ppt QoQ. Management communicated that 4Q12 NPI margin is more reflective of future margins. Finance costs more than doubled to S$6.5m (+106% YoY), chiefly from additional interest expense and amortisation of transaction costs as a result of the issuance of S$250m and S$75m of notes under the EMTN Programme in Jul 2012 and Nov 2012 respectively. 4Q12 results were generally in line with our expectations; DPU of 0.74 S cents formed 97% of our estimate.

Healthy balance sheet
NAV per unit rose 6.3% QoQ to 56.16 S cents, giving a current P/B of 0.93x. Gearing remains healthy at 24.5%. The weighted average maturity of debt facilities at end FY12 was approximately three years, with no refinancing required until June 2014. 68% of LMIRT’s S$1.75b asset portfolio remains unencumbered. Management indicates that the average weighted all-in cost of debt for FY13 is likely to be 5.5%-5.7%. Management intends for LMIRT to amass a S$4b portfolio over the next three to five years. The portfolio occupancy rate of 94% as at 4Q12 is significantly above Indonesia’s retail industry average rate of ~88%. 

Downgrade to HOLD
We maintain our fair value of S$0.52, however, since that is near the current unit price, we downgrade LMIRT to a HOLD. We estimate a FY13F yield of 6.9%.

Lippo Malls Indonesia Retail Trust

OCBC on 4 Jan 2013

According to a Bloomberg article dated 21 Dec 2012, PT Lippo Karawaci, Indonesia’s largest listed property company and LMIRT’s sponsor, will have finished building about half of the 15 new malls it has planned for by 2015, in cities such as Semarang in north Java, Denpasar in Bali and Manado in north Sulawesi province. Starting from a lower base of development, we believe that some of these cities should see higher rates of retail growth than Jakarta. These malls could serve as a longer term pipeline for LMIRT. We maintain our fair value of S$0.52 and BUY rating on LMIRT.

Completed acquisition of two malls
In Oct 2012, LMIRT acquired four retail properties via non-interested party transactions. Since winning unitholders’ approval (at a 13 Dec 2012 EGM) for the acquisition of two more retail malls via interested party transactions, LMIRT has completed the acquisition of both malls in 2012. Funding for these acquisitions chiefly come from: 1) issuance of S$250m in early Jul under its S$750m MTN programme (the S$200m three-year notes were priced at 4.88% while the S$50m five-year notes were priced at 5.875%, giving a blended interest rate of ~5.1%), and (2) issuance of S$75m 4.48% five-year notes in Nov.

LT pipeline from sponsor
According to a Bloomberg article dated 21 Dec 2012, PT Lippo Karawaci, Indonesia’s largest listed property company and LMIRT’s sponsor, will have finished building about half of the 15 new malls it has planned for by 2015, in cities such as Semarang in north Java, Denpasar in Bali and Manado in north Sulawesi province. Starting from a lower base of development, we believe that some of these cities should see higher rates of retail growth than Jakarta. These malls could serve as a longer term pipeline for LMIRT. 

Increase in minimum wage
It has been announced that minimum wages will be increased across Indonesia, with the highest increase planned for Jakarta – an increase of 44% in 2013 to IDR 2.2m (~S$280 per month). The increase in minimum wages could result in higher consumer spending, although the increases are likely to be concentrated at the lowest-end retail outlets. Indonesia’s retail sales index grew by 19% in Oct 2012. Management has indicated that rents for most tenants are rising by ~5% p.a., while rents for anchor tenants are increasing by ~3% p.a. 

Maintain BUY
We maintain our fair value of S$0.52 and BUY rating on LMIRT.

Lippo Malls Indonesia Retail Trust

OCBC on 12 Nov 2012

With effect from 1 May 2012, LMIRT engaged a third party operating company to co-manage its individual retail malls. The operating company is responsible for all costs directly related to the maintenance and operation of the individual retail malls, as well as pay for the rental of office and use of equipment. The operating company also has the right to collect a service charge and statutory income from the tenants. The adjustments for 2Q12 were reflected in the 3Q12 results. 3Q12 results were better than what we expected, partly due to the above arrangements. Total return for the period after tax rose 34.4% YoY to S$21.2m. 9M12 total return for the period before tax and revaluation of S$78.5m equaled 82% of our prior FY12F estimate, which we now raise to S$103m. Rolling forward our model, we raise our fair value from S$0.47 to S$0.52 and upgrade LMIRT from Hold to BUY.

Third party operating company
With effect from 1 May, LMIRT engaged a third party operating company to co-manage its individual retail malls. In the agreements entered into between the property manager PT Lippo Malls Indonesia and the operating company, the operating company is responsible for all costs directly related to the maintenance and operation of the individual retail malls, as well as pay for the rental of office and use of equipment. The operating company also has the right to collect a service charge and statutory income from the tenants. Due to the delay of finalisation of legal documentation and transition of operational responsibilities to the operating company, the service charge and utilities recovery income, and the corresponding expenses for 1 May to 30 Jun, which were taken up in the financial statements of 2Q12, were accounted for accordingly in 3Q12. The adjustment has been reflected in other gain/ (losses) (net).

3Q12 results better-than-expected
3Q12 results were better than what we expected, partly due to the above agreements. 9M12 total return for the period before tax and revaluation of S$78.5m equaled 82% of our prior FY12F estimate, which we now raise to S$103m. 3Q12 gross revenue fell 8.2% YoY to S$30.6m, mainly due to the effect of exchange rates and because 3Q11 gross revenue includes receipt of service charge and utilities recovery from the malls’ operational activities. The decrease in gross revenue was partly offset by the contributions from Pluit Village and Plaza Medan Fair, which were acquired in Dec 2011. Property operating expenses fell from S$10.8m to S$1.0m and net property income rose 31.3% YoY to S$29.5m. Financial expenses rose 186% to S$5.9m mainly due to additional interest expenses and amortisation of transaction costs as a result of the issuance of S$250m worth of notes in 3Q12. Total return for the period after tax rose 34.4% YoY to S$21.2m. 

Upgrade to BUY
Rolling forward our model, we raise our fair value from S$0.47 to S$0.52 and upgrade LMIRT from Hold to BUY.

Lippo Malls Indonesia Retail Trust

OCBC on 25 Oct 2012

LMIRT has announced the proposed acquisitions of two retail properties, Pejaten Village, located in Jakarta, and Binjai Supermall, located in Binjai, North Sumatra. The purchase consideration for Pejaten Village is IDR748.0b (~S$96.0m). The purchase consideration for Binjai Supermall is IDR237.5b (~S$30.5m). Apart from the financing the acquisitions from the proceeds raised from the issuance of S$250m worth of notes in early Jul, LMIRT will need to raise additional funds. These two proposed acquisitions come shortly after the announcement of the proposed acquisitions of four properties on 10 Oct. The completion of the acquisitions of Palembang Square Extension and KJI took place on 15 Oct, half a month earlier than what we expected. Adjusting our model, we raise our fair value from S$0.45 to S$0.47, and maintain our HOLD rating on LMIRT.

Two more properties
LMIRT has announced the proposed acquisitions of two retail properties, Pejaten Village, located in Jakarta, and Binjai Supermall, located in Binjai, North Sumatra. As at 30 Jun, the occupancy rates are 95.2% and 91.4% respectively. The purchase consideration for Pejaten Village is IDR748.0b (~S$96.0m), a 12.6% discount to the average of its independent valuations. The purchase consideration for Binjai Supermall is IDR237.5b (~S$30.5m), 5.2% less than the average of its independent valuations. Binjai Supermall is the only mall in Binjai City, which serves as a transit point between Medan, the largest city in Sumatra, and Aceh, where both have high population densities. These two transactions would be interested party transactions.

Slew of acquisitions
The two proposed acquisitions come shortly after the announcement of the proposed acquisitions of four properties – Palembang Square, Palembang Square Extension, Tamini Square and Kramat Jati Indah Plaza (KJI) – on 10 Oct. The completion of the acquisitions of Palembang Square Extension and KJI took place on 15 Oct, half a month earlier than what we expected. We continue to expect that the acquisition of Palembang Square and Tamini Square will be completed on 1 Nov 2012. Including the aggregate purchase consideration of ~S$180.7m and the acquisition fee payable to the manager, as well as professional fees and other expenses, the total acquisition cost for these four properties is expected to be S$188.1m. 

Adjusting our model
Apart from financing the acquisitions from the proceeds raised from the issuance of S$250m worth of notes in early Jul, LMIRT will need to raise additional funds. We assume ~S$60m in debt fundraising on 1 Jan 2013 and assume that the proposed acquisitions of Pejaten Village and Binjai Supermall will be completed on the same day. We had previously assumed that any new acquisitions would be completed on 1 Apr 2013.

Raise FV, maintain HOLD
Adjusting our model, we raise our fair value from S$0.45 to S$0.47, and maintain our HOLD rating on LMIRT.

Lippo Malls Indonesia Retail Trust

OCBC on 11 Oct 2012

LMIRT has announced the proposed acquisitions of four properties from non-interested parties. Two properties, Palembang Square and Palembang Square extension, would be LMIRT’s first malls in Palembang. The third and fourth properties are Tamini Square and Kramat Jati Indah Plaza (KJI), which are located in East Jakarta. All four properties are to be purchased at a discount to book value. Including the aggregate purchase consideration of ~S$180.7m and the acquisition fee payable to the manager, as well as professional fees and other expenses, the total acquisition cost is expected to be S$188.1m. As to be expected, management is proposing to finance the acquisitions from the proceeds raised from the issuance of S$250m worth of notes in early Jul. Incorporating the acquisitions into our model, we maintain our fair value of S$0.45 and our HOLD rating on LMIRT.

Proposed acquisitions
Yesterday, LMIRT announced the proposed acquisitions of four properties from non-interested parties. The first property is Palembang Square, which is currently undergoing AEI that will increase its NLA by ~30%. The second property is Palembang Square Extension, a new one-level underground retail mall which opened in 2Q12. It is directly connected with the first property. These properties, which would be LMIRT’s first in Palembang, South Sumatra, are part of a mixed-use development that also consists of a hotel and a proposed hospital. The third and fourth properties are Tamini Square and Kramat Jati Indah Plaza (KJI), which are located in East Jakarta. All four properties are to be purchased at a discount to book value. Including the aggregate purchase consideration of ~S$180.7m and the acquisition fee payable to the manager, as well as professional fees and other expenses, the total acquisition cost is expected to be S$188.1m. 

Rental guarantee for KJI
As at Jun 2012, the occupancy rate at KJI was ~51%. Management indicates that as of Aug the AEI at KJI has been completed and as of the beginning of Sep, the occupancy rate, included committed tenancy agreements, was in the high 70s in percentage terms. As the mall is stabilising, the KJI vendor will provide a rental guarantee of ~S$1.4m per quarter for FY2013 and FY2014.

Updating our model
As to be expected, management is proposing to finance the acquisitions from the proceeds raised from the issuance of S$250m worth of notes in early Jul. Post-acquisition, the aggregate leverage will be ~22%. We assume that the proposed acquisitions will be completed on 1 Nov 2012. We also assume that additional acquisitions totaling ~S$60m closing on 1 Apr 2013 will take place to use up the remainder raised under the issuance of S$250m of notes (blended interest cost of ~5.1%).

Maintain HOLD
We maintain our fair value of S$0.45 and our HOLD rating.

Lippo Malls Indonesia Retail Trust

OCBC on 19 Sept 2012

We have incorporated assumptions into our model about potential acquisitions that may be funded by the S$250m raised by LMIRT in early Jul under its S$750m MTN programme. We assume the acquisitions will be yield-accretive with initial net property yields of ~8.5%. The S$200m 3-year bonds were priced at 4.88% while the S$50m 5-year bonds were priced at 5.875%, giving a blended interest rate of ~5.1%. Since no proposed acquisitions have been announced yet, we believe that the end of this year is the earliest any acquisitions are likely to be completed. Before the acquisitions are completed, there is likely to be a drag on DPU due to the additional interest expense. We also have some concern about growth in the Jakarta retail space supply over 2012 and 2013 (+12.1% YoY and +18.2% YoY). We maintain our fair value of S$0.45 but downgrade LMIRT to a HOLD since the share price is close to our fair value.

Incorporating acquisition assumptions
We have incorporated assumptions into our model about potential acquisitions that may be funded by the S$250m raised by LMIRT in early Jul under its S$750m MTN programme. The S$200m 3-year bonds were priced at 4.88% while the S$50m 5-year bonds were priced at 5.875%, giving a blended interest rate of ~5.1%. Before the acquisitions are completed, we should see a short-term drag on DPU due to the additional interest expense. We anticipate that the acquisitions will be yield-accretive with initial net property yields of ~8.5%. We assume an acquisition of S$100m will be completed on 1 Jan 2013 and an acquisition of S$150m will be completed on 1 Apr 2013.

Good pre-commitment level for 2012 JKT retail supply
According to DTZ, there was no new additional retail space supply for Jakarta in 1Q12. In 2Q12, the 21k sqm Ancol Beach City in North Jakarta brought the total supply to 1.94m sqm in NLA. The total supply growth expected for 2012 is 12.1% YoY, with Kota Kasablanka (82k sqm) and Ciputra World (130k sqm), both located in South Jakarta, forming the rest of the supply. The pre-commitment level for the 233k sqm is 88%, in line with the 2Q12 Jakarta retail market occupancy rate of 87.5%.

Significant supply coming onboard in 2013
LMIRT registers 58% of its portfolio NLA in Greater Jakarta. 16% of the portfolio NLA is located in North Jakarta (Pluit Village), and another 14% is located in South Jakarta (The Plaza Semanggi and Depok Town Square Units). It is worthwhile noting that some 391k sqm of retail space is expected to come to the market in 2013 (DTZ), implying substantial YoY growth of 18.2%, which will likely increase competition.

Downgrade to HOLD
We maintain our fair value of S$0.45 but downgrade LMIRT to a HOLD since the share price is close to our fair value.

Lippo Malls Indonesia Retail Trust

OCBC on 6 Aug 2012

Lippo Malls Indonesia Retail Trust’s (LMIRT) 1H12 DPU of 1.48 S cents was slightly below our expectations due to larger-than-expect impact from unfavourable forex movement. However, the portfolio operating metrics and outlook remain buoyant. As at 30 Jun, LMIRT’s overall occupancy rate remained steady at 94.7% vs. 94.5 in prior quarter. This is significantly higher than Indonesia’s retail industry average of 86.7%. We also understand that LMIRT launched two bonds in early Jul. This leads us to believe that another round of acquisitions may be imminent, given that its financial position was already very strong. This may potentially boost LMIRT’s DPU going forward. We maintain our BUY rating on LMIRT with revised fair value of S$0.45 (S$0.43 previously) as we tweak our rental assumptions in FY13-14 to reflect better growth outlook.

Larger-than-expected impact from forex movement
Lippo Malls Indonesia Retail Trust’s (LMIRT) reported 2Q12 NPI of S$30.7m and distributable income of S$17.1m, up 36.2% and 44.3% YoY respectively. Expectedly, the strong performance was driven by full-quarter contribution from Pluit Village and Plaza Medan Fair that were acquired in Dec 2011. DPU for the quarter came in at 0.79 S cents, down from 1.09 S cents as a result of the 1-for-1 rights issue in 4Q11. However, this represents a 14.5% QoQ improvement from DPU of 0.69 S cents achieved in prior quarter. For 1H12, NPI grew 37.1% YoY to S$61.6m, meeting 51.1% of full-year estimate. 1H12 DPU, on the other hand, was down 34.5% to 1.48 S cents, equivalent to 42.9% of our DPU projection. This is slightly below our expectations, due to larger-than-expect impact from unfavourable forex movement.

Outlook remains buoyant
Nevertheless, the portfolio operating metrics and outlook remain buoyant, in our view. As at 30 Jun, LMIRT’s overall occupancy rate remained steady at 94.7% vs. 94.5 in prior quarter. This is significantly higher than Indonesia’s retail industry average of 86.7%, based on Jones Lang Lasalle’s 1Q12 market review report. Management reiterated that Jakarta remains ‘under-shopped’ and that the retail industry will continue from the robust domestic economy and burgeoning middle class population. This is likely to continue to drive the demand for LMIRT’s retail space.

Maintain BUY
We also understand that LMIRT launched two bonds with an aggregate amount of S$250m in early Jul. This leads us to believe that another round of acquisitions may be imminent, given that its financial position was already very strong. While finance expenses may be higher in the immediate term, LMIRT’s DPU is likely to be boosted going forward. Gearing post bond issue is expected to remain healthy at 21% (9.3% in 2Q; no refinancing needs till 2014). Maintain BUY on LMIRT with revised fair value of S$0.45 (S$0.43 previously) as we tweak our rental assumptions in FY13-14 to reflect better growth outlook.

Lippo Malls Indo Retail Trust

OCBC on 27 June 2012

Lippo Malls Indonesia Retail Trust’s (LMIRT) financial flexibility and debt maturity profile is expected to be enhanced with the proposed issuance of two fixed-rate notes under its S$750m guaranteed Euro MTN programme. For FY12, we are positive that the REIT will continue to perform, given the strong domestic consumption in Indonesia. We note that LMIRT’s unit price has fallen 10.5% from its last peak in 24 Apr in tandem with the broader market, despite the expected resilience from its underlying portfolio. This presents a favourable entry point for investors, in our view. As such, we maintain our BUY rating on LMIRT with unchanged fair value of S$0.43.

Notes from MTN programme to provide financial flexibility
Lippo Malls Indonesia Retail Trust’s (LMIRT) financial flexibility and debt maturity profile is expected to be enhanced with the proposed issuance of two fixed-rate notes under its S$750m guaranteed Euro MTN programme. The REIT announced last evening that the S$200m notes and S$50m notes will mature on 6 Jul 2015 and 6 Jul 2017 respectively, and will bear a competitive rate of 4.88% and 5.875% to its existing S$147.5m secured borrowing rate of ~4.6%. This is despite the notes being unsecured obligations of LMIRT. According to the announcement, proceeds will be utilized for corporate funding purposes, including financing acquisitions and asset enhancement works. We believe LMIRT will first use the funds on major refurbishments of Gajah Mada Plaza and Ekalokasari Plaza, as announced in its 2011 annual report.

Good performance likely to be sustained
For FY12, we are positive that LMIRT will continue to perform, given the strong domestic consumption in Indonesia. Real retail sales have consistently been raking in double-digit YoY growth since Nov 2011 (Apr 2012: 10.5%), while the current expectation is that sales will further improve in the following 3-6 months, based on the retail sales survey by Central Bank of Indonesia. This is likely to drive the shopper traffic at its malls and keep its tenant retention rate at high levels (Dec 2011: 80.0%). Already, we note that LMIRT’s portfolio occupancy as at 31 Mar was at 94.5%. This is above the industry average of 87.6%.

Maintain BUY
We continue to like LMIRT for its strong financial position (aggregate leverage at 9.2%, with no refinancing needs until 2014), growth potential and sound industry fundamentals. The unit price has fallen 10.5% from its last peak in 24 Apr in tandem with the broader market, despite the expected resilience from its underlying portfolio. This presents a favourable entry point for investors, in our view. As such, maintain BUY with unchanged fair value of S$0.43.

Lippo Malls Indonesia Retail Trust

OCBC on 2 May 2012

Lippo Malls Indonesia Retail Trust’s (LMIRT) 1Q12 DPU was slightly lower than expected at 0.69 S cents (18.6% of our FY12F DPU), due to higher tax expenses and one-off charges of ~S1.7m. However, LMIRT’s fundamentals remain strong, with portfolio occupancy holding steady at 94.5% (94.1% in prior quarter), well above Indonesia’s retail industry average occupancy rate of ~87.6%. According to management, its malls have been seeing strong interest by international and local retailers, while shopper traffic has been rising amid strong domestic consumption. LMIRT also reiterated that Jakarta remains ‘under-shopped’, as evidenced by its low retail density of 0.4 sqm per person. Hence, it is confident that its retail malls are well positioned to benefit from the burgeoning Indonesian retail industry. We now revise our FY12-13 forecasts to factor in the 1Q results. Accordingly, our fair value eases slightly from S$0.45 to S$0.43. Maintain BUY.

NPI boosted by newly acquired retail malls
Lippo Malls Indonesia Retail Trust’s (LMIRT) 1Q12 gross revenue of S$45.6m (+39.0 YoY) and NPI of S$30.9m (+38.0% YoY) were in line with our expectations, meeting 25.1-25.6% of our full-year estimates. The strong performance was primarily driven by a full-quarter contribution of the two retail malls that were acquired in 4Q11. Distributable income, however, was slightly lower than expected at S$15.0m, due to higher tax expenses and one-off charges of ~S1.7m associated with the refinancing and acquisition activities in prior quarter. As a result, DPU for the quarter registered 0.69 S cents, forming 18.6% of our FY12F DPU (20.9% of consensus). This is lower than the DPU of 1.17 S cents seen a year ago due to a 1-for-1 rights issue in 4Q11, but represents a significant QoQ improvement of 30.2%. The DPU will be payable on 24 May.

Positive outlook
As at 31 Mar, LMIRT’s portfolio occupancy had remained steady at 94.5% (94.1% in prior quarter). This is well above Indonesia’s retail industry average occupancy rate of ~87.6%. According to management, its malls have been seeing strong interest by international and local retailers, while shopper traffic has been rising amid strong domestic consumption. LMIRT also reiterated that Jakarta remains ‘under-shopped’, as evidenced by its low retail density of 0.4 sqm per person relative to 0.7 sqm in Singapore and 2.7 sqm in Kuala Lumpur. Hence, it is confident that its retail malls are well positioned to benefit from the burgeoning Indonesian retail industry.

Maintain BUY; but lowering fair value from S$0.45 to S$0.43
LMIRT’s aggregate leverage was slightly up from 8.7% in 31 Dec to 9.2%, largely due to a 5.0% QoQ decline in investment properties resulting from the effect of forex rate changes. However, its financial position is still strong in our view, with no refinancing needs until Jun 2014. We now revise our FY12-13 forecasts to factor in the 1Q results. Accordingly, our fair value eases slightly from S$0.45 to S$0.43. Maintain BUY on LMIRT, as we are still looking at favourable total expected return of 13.3%.

Lippo Malls Indo Retail Trust

OCBC on 20 Feb 2012

Lippo Malls Indonesia Retail Trust (LMIRT) reported 4Q11 NPI of S$24.6m and DPU of 0.53 S cent, consistent with our quarterly forecasts of S$23.7m and 0.58 S cent respectively. Moving forward, we believe that LMIRT’s financial performance in the coming quarters is likely to remain favorable, especially with full-quarter contributions from recently-acquired Pluit Village and Plaza Medan Fair going forward. As at 31 Dec 2011, LMIRT’s aggregate leverage was at low 8.7% (10.1% in 3Q). In addition, approximately S$931m (60.4%) of its assets are unencumbered. This gives LMIRT the financial capacity and flexibility to realize its growth plans. Maintain BUY with unchanged fair value of S$0.45 on LMIRT.

4Q11 results within expectations. Lippo Malls Indonesia Retail Trust (LMIRT) reported NPI of S$24.6m (+16.8% YoY) and distributable income of S$11.4m (-5.1% YoY) for 4Q11. This is in line with our quarterly forecasts of S$23.7m and S$12.7m respectively. DPU for the quarter (post rights issue) came in at 0.53 S cent, lower than 4Q10 DPU of 1.11 S cents but still consistent with our projection of 0.58 S cent. For FY11, NPI grew by 7.9% to S$92.0m and distributable income fell 0.9% to S$47.4m. DPU, on the other hand, was down 13.0% to 3.85 S cents. However, this translates to a still attractive FY11 yield of 9.9%.

Optimistic outlook from management. Moving forward, LMIRT reiterated that its retail malls are likely to continue to benefit from Indonesia’s robust economic growth and strong domestic consumption. Management also highlighted that there is a demand-supply imbalance for quality retail space, which is likely to keep the demand for its malls strong. We note that its portfolio occupancy rate as at 31 Dec 2011 remained healthy at 94.1% (97.8% in prior quarter), well above Indonesia’s retail industry average of 87.6%. The Dec 2011 Retail Sales Survey by Bank Indonesia also showed that retail sales is expected to remain strong throughout 1H12. Hence, we concur with LMIRT that its financial performance in the coming quarters is likely to remain favorable, especially with full-quarter contributions from recently-acquired Pluit Village and Plaza Medan Fair going forward.

Financial position remains strong. As at 31 Dec 2011, LMIRT’s aggregate leverage was at low 8.7% (10.1% in 3Q), boosted by a positive 5.7% YoY revaluation of assets (excluding acquisition assets) and rights issue. In addition, approximately S$931m (60.4%) of its assets are unencumbered. This gives LMIRT the financial flexibility and capacity to realize its growth plans. Maintain BUY with unchanged fair value of S$0.45 on LMIRT.