LMIR – OCBC
A pure Indonesia retail play
Singapore-listed Indonesia-focused REIT. Lippo-Mapletree Indonesia Retail Trust (LMIR) is the first Singapore-listed REIT to provide exposure to Indonesia’s burgeoning retail sector. The trust’s investment focus is on income-generating retail malls and retail strata spaces that are strategically located within well-established population catchment areas.
Strong investment case for Indonesia. Indonesia, which enjoys inherent advantages such a wealth of natural resources and a young population, is currently enjoying economic growth and stability under a new political regime. This means growing prosperity among the population and a better quality of life. The emergence of a sizeable urban middle class and a lifestyle shift towards consumerism has made consumption – and the retail sector – the key beneficiary of the Indonesia growth story.
Plenty of growth opportunities, but pace may slow. We believe that LMIR has ample opportunities for inorganic growth thanks to a highly fragmented retail property sector. LMIR came to the market with a clear and ambitious acquisition pipeline from both third-party sellers and through a ROFR granted by its sponsor PT Lippo Karawaci Tbk. It made its maiden post-IPO acquisition worth S$147.4m last month, increasing its portfolio NLA by almost 20%. However, with the present uncertain environment, acquisitions may be made at a slower pace than previously planned.
Key risks. Exchange rate volatility is potentially a concern as both DPU income and interest expenses are SGD-denominated. However, LMIR has entered into forex hedges that should minimize IDR-SGD volatility and protect investor DPU. A steep depreciation in the Rupiah could still threaten NAV as asset values would fall in SGD terms. As LMIR is capitalizing on the low cost of SGD-denominated debt, this balance sheet mismatch could put further pressure on NAV. General country risks, such as political instability and high inflation, also exist.
Initiate coverage with BUY and S$0.70 fair value. LMIR is currently trading at a 30% discount to its S$0.80 IPO price. Our RNAV value of LMIR is S$0.87. In line with the S-REIT universe which is trading at deep discounts to NAVs, our fair value estimate of S$0.70 prices in a 20% discount to our RNAV value. Nevertheless, this offers a 24% upside from current levels. We are projecting FY08 DPU of 5.8 S cents and FY09 DPU of 6.0 S cents. The strong investment case for Indonesia and high distribution yields of more than 10% compel us to initiate coverage on the trust with a BUY rating.