Another hit from weaker IDR

• 1Q14 DPU down 23.6% YoY
  
• Future distribution likely to stabilize
  
• Stronger financial position
  

1Q14 results missed expectations

Lippo Malls Indonesia Retail Trust (LMIR Trust) reported a dismal set of 1Q14 results, with gross revenue falling 14.5% YoY to S$33.7m and NPI down 16.6% YoY to S$31.1m. The soft performance was mainly due to the expiry of rental guarantee income from Pluit Village and a 15.8% depreciation of IDR against SGD. DPU for the quarter

slipped 23.6% to 0.68 S cents, further dragged down by higher finance and other costs. This is below market expectations, given that the quarterly distribution only met 18.7%/21.3% of our/consensus FY14 DPU forecasts. Nevertheless, on a sequential basis, DPU represents a 21.4% improvement, aided by hedging and capital management efforts by LMIR Trust.

Fundamentals still sound

We understand that the currency hedges in place previously were only effective for ~15%-16% of the income. However, over 90% of the income is now covered with the new hedges, which should provide greater stability to LMIR Trust’s distribution going forward. Underlying portfolio performance, we note, has been encouraging thus far, with gross rental income in IDR terms growing 6.3% YoY and portfolio improving 1.8ppt YoY to 95.6% (4Q13: 95.0%). While there was a jump in property operating expenses (+46.2% YoY in IDR terms), we note that this was due to a change in the recognition of parking income (LMIR Trust now operates the mall car parks in-house rather than outsourcing to third-party). In addition, average rental reversion of 9.4% was achieved during the quarter.

Maintain HOLD

Over the quarter, LMIR Trust also repaid its S$147.5m term loan. As a result, gearing ratio improved from 34.3% registered in 4Q13 to 26.7%, with no refinancing needs until Jul 2015. With the stronger financial position, management said it is well positioned for future growth. We note that LMIR Trust is currently exploring at least one investment opportunity, and may potentially conclude a deal this year. However, pending any material development, we lower our fair value slightly from S$0.39 to S$0.37 to account for the weak results. Maintain HOLD.

4Q13 a miss

• Weak IDR drags down results
  
• Repaid S$147.5m facility
  
• Maintain HOLD
  

4Q13 gross rental income contracts 4%

LMIRT’s 4Q13 results were significantly below ours and the street’s expectations. FY13 DPU of 3.25 S cents formed only ~93% of ours and the street’s prior estimate. LMIRT reported 4Q13 gross rental income of S$33.9m, down 4.0% YoY. Net property income (NPI) was S$31.1m, down 5.5% YoY. 4Q13 average IDR/SGD rate depreciated 15.4% YoY, pulling down the results. In IDR-terms, 4Q13 gross rental income and NPI increased by 13.5% YoY and 11.7% YoY respectively. Distributable income fell by 14.6% YoY to S$13.8m and 4Q13 DPU contracted 24.3% YoY to 0.56 S cents (down 36% QoQ). LMIRT’s NAV has fallen from S$0.4528 at end-Sep 2013 to S$0.4115 at end-Dec 2013. For FY13, gross rental income rose by 16.5% YoY to S$153m, chiefly due to the six malls acquired in 4Q12. FY13 DPU is 10.2% higher YoY.

Refinancing completed

The S$147.5m loan facility with all-in-cost of 6.77% p.a. that was set to mature in Jun 2014 was repaid in Jan. Recap that a S$150m 4.25% fixed rate note was issued on 4 Oct 2013. It is scheduled to mature in Oct 2016. Finance expenses jumped in 4Q13 by 37.5% YoY to S$9.0m due to the note issued last Oct and the S$75m note issued in Nov 2012. 4Q13 other losses was S$1.0m, versus S$0.2m a year ago, mainly due to a realised loss on FX of S$1.4m.

Good occupancy

LMIRT’s portfolio had an average occupancy of 95.0% as at end-Dec 2013. This is higher than the industry average of 81% (according to the 3Q13 Colliers report for retail properties in greater Jakarta). Weighted Average Lease to Expiry (by NLA) as at 31 Dec 2013 was 4.94 years. Average rental reversion for 4Q13 was 11.1%.

Maintain HOLD

Adjusting our assumptions, including raising our cost of equity assumption from 10.1% to 10.6%, we reduce our FV from S$0.45 to S$0.39. Maintain HOLD. We estimate a FY14F yield of 9.2%.

Weakening IDR likely to affect NAV

• IDR has fallen 7.4% vs. SGD since end Jun
  
• Valuation of properties in SGD likely affected
  
• Raise discount rate; Reduce FV to S$0.44
  

Concern over FX movement

The IDR has weakened some 7.4% against the SGD since 28 Jun, with SGD1 buying IDR8558.25 as at 21 Aug, compared to IDR7922.96 on 28 Jun (Bloomberg). We understand that only ~65% of the cash flow from the properties for 2H13 are likely hedged for depreciation of IDR against SGD. In addition, the weakening of the IDR against the SGD does not bode well for the valuation of LMIRT’s properties in SGD terms, which means that NAV would likely be affected negatively.

No surprises in 2Q13

To recap, LMIRT posted 2Q13 gross rental income of S$40.1m, up 30.2% YoY. The increase was mainly due to the acquisition of the six new malls in 4Q12, and positive rental reversions of 15.5% for the existing malls. Total revenue (equivalent to gross rental income in 2Q13) fell 12.5% YoY due to the inclusion of service charge and utilities recovery income from the malls’ operational activities in 2Q12. Such activities have been outsourced to a third party operating company with effect from 1 May 2012 and there is also a related decrease in expenses registered in 2Q13. Distributable income increased by 19.5% YoY to S$20.5m and DPU climbed 17.7% YoY to 0.93 S cents. Results for the quarter were in line with our expectations and consensus’. 1H13 DPU of 1.82 S cents forms 50.6% of our FY13 estimate of 3.6 S cents, which we maintain for now.

Plans to acquire property this year

Gearing remains healthy at 24.2%. LMIRT may refinance the S$147.5m term loan due Jun 2014 as early as late 2013. Approximately 68% of LMIRT’s S$1.77b portfolio remains unencumbered, providing LMIRT with financial flexibility for future acquisitions. Management hopes to acquire at least one property this year.

Maintain HOLD

To reflect a higher risk profile for LMRT’s unit price, especially given the outflow of funds from emerging markets, we incorporate a higher cost of equity of 10.8%, versus 9.7% previously, and trim our DDM-based FV to S$0.44 from S$0.49. Maintain HOLD. We estimate a FY13F yield of 7.9%.

DOWNGRADE TO HOLD

• 4Q12 in line
  
• Good occupancy
  
• Downgrade to HOLD
  

4Q12 in line

LMIRT posted 4Q12 gross rental income of S$33.0m, up 35% YoY. The increase was primarily due to the contributions from Pluit Village and Plaza Medan Fair (acquired in 4Q11) and marginal contributions from the six acquisitions made in 4Q12. Total revenue (equivalent to gross rental income in 4Q12) fell 11% YoY to S$33.0m. This is because of the absence of the service charge and utilities recovery following the outsourcing of the operational services to a third-party operating company with effect from 1 May 2012. Net property income margin was at 93.4%, down 3.2 ppt QoQ. Management communicated that 4Q12 NPI margin is more reflective of future margins. Finance costs more than doubled to S$6.5m (+106% YoY), chiefly from additional interest expense and amortisation of transaction costs as a result of the issuance of S$250m and S$75m of notes under the EMTN Programme in Jul 2012 and Nov 2012 respectively. 4Q12 results were generally in line with our expectations; DPU of 0.74 S cents formed 97% of our estimate.

Healthy balance sheet

NAV per unit rose 6.3% QoQ to 56.16 S cents, giving a current P/B of 0.93x. Gearing remains healthy at 24.5%. The weighted average maturity of debt facilities at end FY12 was approximately three years, with no refinancing required until June 2014. 68% of LMIRT’s S$1.75b asset portfolio remains unencumbered. Management indicates that the average weighted all-in cost of debt for FY13 is likely to be 5.5%-5.7%. Management intends for LMIRT to amass a S$4b portfolio over the next three to five years. The portfolio occupancy rate of 94% as at 4Q12 is significantly above Indonesia’s retail industry average rate of ~88%.

Downgrade to HOLD

We maintain our fair value of S$0.52, however, since that is near the current unit price, we downgrade LMIRT to a HOLD. We estimate a FY13F yield of 6.9%.

3Q12 RESULTS ABOVE EXPECTATIONS

• Operating company
  
• Above expectations performance
  
• Raise FV to S$0.52
  

Third party operating company

With effect from 1 May, LMIRT engaged a third party operating company to co-manage its individual retail malls. In the agreements entered into between the property manager PT Lippo Malls Indonesia and the operating company, the operating company is responsible for all costs directly related to the maintenance and operation of the individual retail malls, as well as pay for the rental of office and use of equipment. The operating company also has the right to collect a service charge and statutory income from the tenants. Due to the delay of finalisation of legal documentation and transition of operational responsibilities to the operating company, the service charge and utilities recovery income, and the corresponding expenses for 1 May to 30 Jun, which were taken up in the financial statements of 2Q12, were accounted for accordingly in 3Q12. The adjustment has been reflected in other gain/ (losses) (net).

3Q12 results better-than-expected

3Q12 results were better than what we expected, partly due to the above agreements. 9M12 total return for the period before tax and revaluation of S$78.5m equaled 82% of our prior FY12F estimate, which we now raise to S$103m. 3Q12 gross revenue fell 8.2% YoY to S$30.6m, mainly due to the effect of exchange rates and because 3Q11 gross revenue includes receipt of service charge and utilities recovery from the malls’ operational activities. The decrease in gross revenue was partly offset by the contributions from Pluit Village and Plaza Medan Fair, which were acquired in Dec 2011. Property operating expenses fell from S$10.8m to S$1.0m and net property income rose 31.3% YoY to S$29.5m. Financial expenses rose 186% to S$5.9m mainly due to additional interest expenses and amortisation of transaction costs as a result of the issuance of S$250m worth of notes in 3Q12. Total return for the period after tax rose 34.4% YoY to S$21.2m.

Upgrade to BUY

Rolling forward our model, we raise our fair value from S$0.47 to S$0.52 and upgrade LMIRT from Hold to
BUY.