LMIR – OCBC

Implications of Matahari Department Stores sale

Matahari sale. Matahari Department Stores (MDS), a related company of LMIR Trust (LMRT), is being sold by its 90.8% owner PT Matahari Putra Prima (MPP). MPP, Indonesia’s largest retailer, owns retailing formats including MDS, Hypermart, Foodmart, Boston Healthcare, Times Bookstore, and Timezone. Its majority owner is the Lippo Group. MDS is being sold to CVC Capital Partners, a private equity group, for IDR 7200b. Most of the cash proceeds will be used by MPP to repay debt. MPP will also get a 20% stake in Meadow Asia, a joint venture that will hold the MDS stake. The proposed deal is currently in process as MPP addresses concerns raised by the local regulatory agency1. 

Major tenant. Several MPP businesses including MDS, Hypermart, and Times Bookstore are tenants at LMRT properties. MDS, which has over 80 department stores in Indonesia, is LMRT’s second largest mall tenant – it contributed 4.1% of mall portfolio gross income in FY09. Meanwhile, all seven retail spaces are leased to MPP for a term of 10+10 years starting from 2007, and a significant portion of that space is utilized by MDS. The spaces contribute 18% of portfolio income as of 31 Dec. 

Implications. We spoke to LMRT’s manager regarding MDS. The sale has no impact on the current lease agreements between MDS and LMRT. We understand that the people running the business are unchanged – so the ground level relationships between LMRT’s leasing team and MDS should remain largely intact. We also note that Lippo Group will continue to have an interest in MDS through MPP’s stake in Meadow Asia. More broadly, we believe the commercial relationship between LMRT and MDS still makes sense – both on a target customer level and also because LMRT has consistently been able to maintain portfolio occupancies significantly above market. Still there could be a risk of tighter negotiations on rents and lease terms. As for the seven retail spaces, MPP is the master lessee and the option to renew the agreements come 2017 still remains with MPP. 

Our view on LMRT is unchanged. Issues that adversely impacted FY09 earnings such as early lease terminations and low retailer budgets for advertising & promotion expenditure will be less of a factor in FY10, in our opinion. We also see increasing chances of an acquisition in the next six to 12 months. A strong IDR, which may continue to be a drag on distributions, is a key risk to our estimates. We maintain our BUY rating and S$0.59 fair value.