LMIR – OCBC

Highlights from malls visit

‘Tis the season to spend. We visited seven of LMIR Trust’s retail malls in Greater Jakarta and Bandung earlier this week and found a healthy, vibrant portfolio carrying on despite a weak retail sector. Both LMIR and retailers are gearing up for a seasonal up-tick in spending during the Ramadan fasting month. Spending typically spikes two weeks before Idul Fitri, when Indonesian companies pay out a mandatory employee bonus of one-month salary (Tunjangan Hari Raya). The manager also seemed optimistic about the Christmas spending season. Our 2H09 DPU estimate is 2.75 S cents, up 3.4% HoH.

Casual leasing back in play. A tight retailer budget for advertising & promotions activities had dampened casual leasing demand in 1H09. Such prudence was very much lacking during our visit. The overwhelming majority of the malls’ atriums and corridors were well populated with island kiosks, exhibitions and sales as retailers positioned themselves for the festive season. Operational control has also tightened with LMIR dealing directly with casual tenants or demanding up-front payments from wholesalers.

Tenant turnover is painful. Some retailers including three anchor tenants that we know of have vacated or downsized space at the malls. The market remains soft with retailers hesitant to invest in new stores. LMIR’s portfolio occupancy is above-market and, in our opinion, the manager has done a credible job in re-populating the space. Still, the turnover process (offer, lease negotiation, fit-out) takes time, affecting occupancy and revenue during the transition. Just fitting out a large anchor tenant can take three to four months. We noticed that the manager is using temporary leasing to support the rent gap between tenants now that A&P demand has picked up. In fact, we found retailers such as BreadTalk; Times bookstore; and Matahari eager to capitalize on the season by utilizing casual leasing while their units get fitted out.

Still compelling. We understand the malls that were part of the acquisition pipeline at IPO have completed works but occupancy levels have yet to stabilize. The manager had earlier guided that the timing or size of any acquisition would depend on availability of funding. In our view, any acquisition scenario is more realistic on a six to 12 months time horizon. If the manager employs SGD-denominated debt, we believe the likelihood of a concurrent equity issue increases due to cautious lender sentiment. Slight variance in estimates edges our fair value estimate up to S$0.51 (prev: S$0.50). Maintain BUY (16% total return).