LMIR – OCBC

Macro signals continue to show strength

Indonesian economy sees growth. Indonesia’s Deputy Finance Minister said this week1 that the economy is likely to have grown by 5.9% YoY in 2Q10. The Central Statistics Agency reported that Indonesia’s GDP grew 5.7% YoY in 1Q10. Domestic consumption accounts for about two-thirds of the Indonesian economy. The Indonesian government has forecast growth of 5.8% in 2010. It also expects growth of 6.1% to 6.4% next year. Earlier this month, Indonesia’s Finance Minister Agus Martowardojo said that he expected economic growth to be underpinned by “household consumption that stays strong, the improving investment climate and the increase in export activities”. We note inflation hit 4.16% in May – its highest level in a year; the IMF noted that monetary policy may need to be adjusted later in 2010 “if inflationary pressures increase” .

Leasing efforts positive. In our view, strong domestic consumption could lift the fortunes of both retailers and retail landlords like LMIR Trust (LMIR). At 1Q10 results, LMIR had reported that retail mall occupancy as of 31 Mar fell 2.2 percentage points compared to three months ago to 93.8%. The manager attributed the occupancy decline mainly to the expiry of rental guarantees, granted by the vendor at the time of LMIR’s IPO, on spaces that had undergone extensive asset enhancement. After including temporary leasing and new leases committed by way of signed letters of intent, occupancy at Mar 2010 was 96% (flat). We spoke to the manager this week and understand that leasing efforts are going well, and occupancy trends are positive. LMIR also reports continued growth of customer average spend per visit. This is supported by other accounts of increasing consumer confidence and consumption – PT Astra International said it expects vehicle sales of 650,000 units in 2010, up 34% YoY.

Valuation. The manager noted at 1Q10 results that the REIT’s “portfolio has a very defensive position with very low upcoming expiries and already high occupancy levels”, which may cap near-term earnings upside from the improving retail environment. Nevertheless, LMIR still has scope for accretion from new acquisitions, thanks to its low leverage of 10.2% debt-to-assets (the lowest in the S-REIT sector). Meanwhile, CFO Shane Hagan tendered his resignation this month, after just a year with LMIR. We don’t expect a significant impact to the REIT, with LMIR’s CEO assuming Mr Hagan’s duties until a replacement is found. Our fair value estimate of S$0.55, at a 20% discount to SOTP value, remains unchanged. With a 23.7% estimated total return, maintain BUY.