LMIR – OCBC

Data points reiterate our investment case

Riding the global slump. Indonesia has received a lot of bad press lately but consensus real GDP growth estimates are still high, ranging between 5.5% and 6% for 2008. This is only marginally lower than the 6.32% growth recorded in 2007, and on par with the growth seen in 2005 and 2006. We believe the investment case for LMIR is still intact. Its portfolio of eight retail malls and seven retail strata spaces is strategically located across Indonesia and boasts strong tenancy profiles with large anchor tenants like hypermarkets. We note that retail sales have historically outperformed GDP growth, averaging a growth of 11% per year since 1998 (Jones Lang LaSalle).

Occupancy is up. LMIR posted S$29.3m in total revenue over 19 Nov 2007 to 31 Mar 2008, missing its IPO forecasts by 5.11%. The REIT had said in April that the variance was due to “reduced rentals” meant to attract traffic driving tenants at four of its retail malls post asset enhancement work. LMIR also said that the variance to prospectus forecasts would be “mitigated in the coming months”. Since then, LMIR has released the occupancy profile of the seven of its eight retail malls owned as of 31 March 2008. Portfolio occupancy had already improved to 95.6% at 31 March from 92.8% at December 2007, which should be reflected in 2Q results.

Focused on improving performance. LMIR continues to focus on improving tenancy mix and occupancy rates. The new Medan mall, which enjoyed 97% occupancy as at April 2008, will also begin contributing to revenue from this quarter onwards. LMIR has also rolled out asset enhancement initiatives worth S$3.3m at its Istana Plaza and Mal Lippo Cikarang malls that will increase the malls’ NLA by 1.7% and 17% respectively. We do expect macro-level uncertainties to slow down LMIR’s acquisition pace versus what was indicated at its IPO. In any case, our
valuation is based solely on the existing portfolio.

We reiterate our BUY rating on LMIR. We expect compelling distribution yields of 10.7% in 2008 and 11% in 2009. The continued volatility of the SGD-IDR exchange rate should be of limited concern to LMIR investors as the trust has hedged both its SGD-denominated distributions and interest expense. While SGD-IDR volatility will not threaten investor income, it could affect NAV as asset values would fall in SGD terms. Our fair value estimate of S$0.70 takes these factors into account.