LMIR – OCBC

Pays out 1.6 S cents for 3Q

Pays out 1.6 S cents. Lippo-Mapletree Indonesia Retail Trust (LMIR) posted S$26.6m in gross revenue in 3Q08, up 8.4% QoQ. Revenue was also 27% higher than guided at LMIR’s IPO last year; primarily due to contributions from post-IPO acquisition Sun Plaza. LMIR’s net property income of S$25m was also 27% higher than the trust’s guidance. However, 3Q profit after tax of S$6.6m was 55% lower than guided because of unrealized losses on both foreign exchange forward contracts and interest rate swaps. Distributable income was up 7% QoQ and 11% higher than LMIR’s guidance. The results were generally in line with our expectations. As of 3Q, LMIR has a very low leverage level of about 9% with no refinancing risk until 2013. The trust will pay out 1.6 S cents for the quarter (35% annualized yield).

Share price down 69%. Since our last report in July, LMIR’s share price has fallen 69% to 18.5 S cents. In contrast, the FTSE S-REIT index has fallen about 50% over the same period. Current price levels also mark a 77% decline from LMIR’s 80 S cents IPO price (November 2007). We think the biggest factor behind the decline has been currency movements against a backdrop of extreme risk aversion. The Indonesian Rupiah (IDR) has devalued about 12% against the Singapore dollar since January, with the biggest spike in the past month itself. Meanwhile, forward rates (Bloomberg) are pricing in exchange rates not seen since the Asian Financial Crisis.

DPU protected, but not NAV. The continued forex volatility should be of limited concern to LMIR investors focused on income, as the trust has hedged both its SGD-denominated distributions and interest expense (debt is SGD-denominated). While SGD-IDR volatility will not threaten investor income, it could affect NAV. LMIR is currently trading at a very low P/Book ratio of 0.2x (based on historical values), but these asset values do not reflect current exchange rates. Investors could see asset values falling in SGD terms and this may also affect gearing levels.

Maintain BUY. We have tried to incorporate these concerns into our valuation. At the same time, we think the retail story in Indonesia is still compelling. The country’s domestic economy has been relatively insulated from recent troubles, especially as the threat of inflation subsides. We take a more cautious view on our assumptions on rental growth, discount rate, and cap rates. Our new fair value estimate is 27 S cents (previously 70 S cents). Maintain BUY.