LMIR – OCBC

3Q10 in line; investment case still compelling

3Q10 in line. LMIR Trust (LMIR) reported 53% YoY gains in 3Q revenue to S$33.8m, thanks to the collection of additional income from services charges receipt / utilities cost recovery on seven retail malls with the 31 Dec expiry of an operating costs agreement in place at listing. This income was offset by the additional costs incurred relating to the maintenance and operation of the malls. Revenue fell 15.9% QoQ but recall that 2Q10 results had reflected the full six months effect for 1H10 due to a delay in the transfer of operations. Net property income of S$22.2m was up 14.5% YoY and 2.7% QoQ, boosted by the strong Indonesian Rupiah (IDR) against the Singapore Dollar (SGD).

DPU of 1.09 S cents. DPU fell 10.7% YoY but gained 4.8% QoQ to 1.09 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 five quarters. LMIR booked a realized (cash) forex loss this quarter of S$2.9m versus a loss of S$2.4m in 2Q10 and a loss of S$0.4m in 3Q09. DPU was just 2.8% ahead of our 1.06 S cents estimate.

Portfolio performance stable. Occupancy at LMIR’s retail malls ticked up 70 basis points from 97.1% at 30 Jun to 98.1% at 30 Sep. This compares favorably to the Jakarta average occupancy of 84.5% (ex strata-title malls) as of Sep 20101 . We note that while some new supply is coming up in the region, the manager was unperturbed due to location and/or positioning factors. It also cited an environment of increasing confidence, with more retailers exploring expansion options. We understand LMIR is also exploring asset enhancement opportunities at some of its existing malls.

Valuation. LMIR is up 9.1% since our last report on 30 Jul. We have revised our earnings estimates upwards marginally. At the same time, we have relaxed our discount rate inputs to better reflect improved market conditions. These factors push our fair value estimate up from S$0.52 to S$0.60 (still at a 20% discount to our SOTP value for LMIR). The investment case for LMIR remains compelling, in our opinion, considering the Indonesia consumption story; LMIR’s defensive portfolio; and the potential for growth on the back of its strong balance sheet (10.8% leverage) and attractive sponsor / third-party pipelines. With 19% estimated total return, maintain BUY.