LMIR – OCBC

Retail story still compelling

Low gearing, sponsor support. We believe perceived risk will drive REIT performance in 2009. As of 3Q, LMIR has a very low leverage level of about 9% with no refinancing risk until 2013. LMIR is currently trading at a 68% discount to book, but those asset values do not reflect current exchange rates.

Retail focus still compelling. We think the retail story in Indonesia is still compelling. The country’s domestic economy offers some insulation from the global crisis. A Reuters poll indicates that while Indonesia will see some slowdown, it will be Southeast Asia’s best performer. The poll forecasted growth of 4.8% next year and 5.6% in 2010, thanks to still healthy consumption1 . LMIR’s portfolio of eight retail malls and seven retail strata spaces is strategically located within well-established population catchments across Indonesia. The portfolio boasts strong tenancy profiles with large anchor tenants such as hypermarkets.

Asset revaluation risk. We note that LMIR’s debt is SGD-denominated. The IDR has seen a large movement against the SGD over the past year. The continued forex volatility should be of limited concern to LMIR investors focused on income, as the trust has hedged both its SGD-denominated distributions and interest expense. However, forex volatility does create a major revaluation risk. LMIR’s assets are due to be revalued in 4Q08. The REIT’s portfolio will be revalued in IDR – this IDR value will then be converted back into SGD at spot rates. Risk appetite for the IDR has recovered from the lows of October. But with the level of volatility seen in the currency this year, the exchange rate on 31st December (which determines asset values) is anybody’s guess. This puts LMIR’s book value at risk – even if the IDR value of the portfolio stays the same. While revaluation gains or losses are non-cash in nature, it would affect LMIR’s gearing level and NAV.

Maintain BUY. In our last report, we had taken a more cautious view on our assumptions on rental growth, discount rate, and cap rates. We have also taken a fresh look at our valuation model, relaxing our fairly bleak expectations for the IDR-SGD. Our RNAV estimate for the REIT is S$0.55. Our fair value estimate of S$0.39 (prev. S$0.27) prices in a 30% discount to that estimate. Maintain BUY.