LMIR – OCBC

DPU disappoints on higher tax expenses

NPI in line. LMIR Trust (LMIR) reported 92% YoY and 72.5% QoQ gains in 2Q revenue to S$40.1m, this as LMIR collected additional income from services charges receipt and utilities cost recovery on seven of its retail malls with the 31 Dec expiry of the operating costs agreement in place at listing. That additional income was offset by the additional costs incurred, relating to the maintenance and operation of the malls. 2Q10 reflects the full six months effect for 1H10 due to a delay in the transfer of operations. Net property income of S$21.6m was up 17% YoY and 6% QoQ, boosted by the strong Indonesian Rupiah (IDR) against the Singapore Dollar (SGD). NPI was in line with our S$21.6m estimate in both SGD and IDR terms. Retail mall occupancy improved 360 bps to 97.4% from three months ago; this is significantly higher than the market average of 82.7%. LMIR is leveraged at 10.3% debtto-assets as of 30 Jun.

But DPU disappoints on tax. 2Q10 DPU fell 20% YoY and 13% QoQ to 1.04 S cents. The manager attributed this to the appreciation in the IDR, which has caused the gap between the hedged rate on distributions and the physical rate to reverse unfavorably in the last four quarters. LMIR booked a realized (cash) forex loss this quarter of S$2.4m versus a loss of S$1.7m in 1Q10 and a realized gain of S$1.2m in 2Q09. This is likely to be a continuing issue as we estimate 3Q’s hedged rate is roughly 15% higher (unfavorably) than current levels. While we had expected the forex impact, DPU was 14% below our 1.21 S cents estimate due to actual tax expense of S$5.5m versus our S$3.6m estimate. The manager explained that it is now incurring revenue tax on the additional service charge and utilities income. It is exploring options to increase tax, and also operational, efficiencies.

Valuation. We have adjusted our earnings estimates to reflect the additional service charge and utilities income and additional operating expenses; we also incorporate actual 1H10 results. Additionally, we have adjusted our tax estimates upwards. On the plus side, we have increased our occupancy estimates. Our FY10-11F DPU estimates fall 11.5% and 12.6% to 4.4 S cents and 4.5 S cents. Finally, our fair value estimate (at an unchanged 20% discount to SOTP value) falls to S$0.52 from S$0.55 previously. With an estimated total return of 14%, maintain BUY on valuation grounds.