LMIR – OCBC

Retail outlook still weak but we see value

Distributable income falls YoY and QoQ. LMIR Trust reported a 20.3% YoY fall in 2Q09 revenue to S$19.5m and a 20.6% YoY fall in net property income to S$18.5m. The manager said about half of the decline was due to the depreciation of the IDR against the SGD. The rest was attributed to a reduction in casual leasing income as well as lower car park and miscellaneous income. Conversely, revenue and NPI rose 4.7% QoQ and 5.5% QoQ respectively thanks to the appreciation of the IDR in the past three months. The positive forex effect offset lower revenue from two of LMIR’s malls undergoing asset enhancement work. Distributable income, which is hedged, fell 12.5% YoY and 4.3% QoQ to S$13.9m. Unitholders will receive 1.3 S cents per unit, in line with our expectations.

Occupancy looks to be stabilizing. Mall occupancy was stable at 95% compared to three months ago, and outperformed the broader market rate of 84% (Jakarta only, Cushman & Wakefield). Mal Lippo Cikarang’s 86.5% occupancy is the lowest within the portfolio due to the non-renewal of anchor space. The manager has temporarily leased the space to factory outlets but is in discussions to secure longer term leases. We understand rent reversions are on average 3-5% above preceding rents. The manager has tried to offset any weakness in rents with shorter lease durations or by incorporating a step-up component.

Retail outlook still weak. Macroeconomic news on Indonesia has generally been quite benign. Low inflation and signs of political stability have boosted consumer confidence. The IMF forecasts growth of 3.5% this year, the fastest pace in Asia after India and China. However, the retail property sector is still plagued by weak demand and oversupply, particularly in Jakarta’s CBD. The manager guided that rental rates could remain soft in 2H09 but expected LMIR’s ‘middle market’ malls to show some resiliency.

But value exists. We have updated our earning estimates to reflect actual 1H performance. We are expecting portfolio performance to stabilize in 2H09, with a slight uplift from completed AEI projects. Our 2H09 DPU estimate is 2.76 S cents, up 3.9% HoH. We have also adjusted our valuation parameters to reflect current market and forex conditions. Our fair value estimate of S$0.50 (prev: S$0.24) is at a 25% discount to our SOTP value of S$0.67 for the trust. Despite the weak near-term retail outlook, we think LMIR presents value in the medium-term. Upgrade to BUY (total return of 22%).