PROPOSAL FOR TWO MORE ACQUISITIONS

• Acquiring two more properties
  
• Multiple acquisitions proposed
  
• Raise FV to S$0.47
  

Two more properties

LMIRT has announced the proposed acquisitions of two retail properties, Pejaten Village, located in Jakarta, and Binjai Supermall, located in Binjai, North Sumatra. As at 30 Jun, the occupancy rates are 95.2% and 91.4% respectively. The purchase consideration for Pejaten Village is IDR748.0b (~S$96.0m), a 12.6% discount to the average of its independent valuations. The purchase consideration for Binjai Supermall is IDR237.5b (~S$30.5m), 5.2% less than the average of its independent valuations. Binjai Supermall is the only mall in Binjai City, which serves as a transit point between Medan, the largest city in Sumatra, and Aceh, where both have high population densities. These two transactions would be interested party transactions.

Slew of acquisitions

The two proposed acquisitions come shortly after the announcement of the proposed acquisitions of four properties – Palembang Square, Palembang Square Extension, Tamini Square and Kramat Jati Indah Plaza (KJI) – on 10 Oct. The completion of the acquisitions of Palembang Square Extension and KJI took place on 15 Oct, half a month earlier than what we expected. We continue to expect that the acquisition of Palembang Square and Tamini Square will be completed on 1 Nov 2012. Including the aggregate purchase consideration of ~S$180.7m and the acquisition fee payable to the manager, as well as professional fees and other expenses, the total acquisition cost for these four properties is expected to be S$188.1m.

Adjusting our model

Apart from financing the acquisitions from the proceeds raised from the issuance of S$250m worth of notes in early Jul, LMIRT will need to raise additional funds. We assume ~S$60m in debt fundraising on 1 Jan 2013 and assume that the proposed acquisitions of Pejaten Village and Binjai Supermall will be completed on the same day. We had previously assumed that any new acquisitions would be completed on 1 Apr 2013.

Raise FV, maintain HOLD

Adjusting our model, we raise our fair value from S$0.45 to S$0.47, and maintain our HOLD rating on LMIRT.

ACQUIRING FOUR PROPERTIES

• First two in Palembang
  
• Rental guarantee for one mall
  
• Maintain FV of S$0.45
  

Proposed acquisitions

Yesterday, LMIRT announced the proposed acquisitions of four properties from non-interested parties. The first property is Palembang Square, which is currently undergoing AEI that will increase its NLA by ~30%. The second property is Palembang Square Extension, a new one-level underground retail mall which opened in 2Q12. It is directly connected with the first property. These properties, which would be LMIRT’s first in Palembang, South Sumatra, are part of a mixed-use development that also consists of a hotel and a proposed hospital. The third and fourth properties are Tamini Square and Kramat Jati Indah Plaza (KJI), which are located in East Jakarta. All four properties are to be purchased at a discount to book value. Including the aggregate purchase consideration of ~S$180.7m and the acquisition fee payable to the manager, as well as professional fees and other expenses, the total acquisition cost is expected to be S$188.1m.

Rental guarantee for KJI

As at Jun 2012, the occupancy rate at KJI was ~51%. Management indicates that as of Aug the AEI at KJI has been completed and as of the beginning of Sep, the occupancy rate, included committed tenancy agreements, was in the high 70s in percentage terms. As the mall is stabilising, the KJI vendor will provide a rental guarantee of ~S$1.4m per quarter for FY2013 and FY2014.

Updating our model

As to be expected, management is proposing to finance the acquisitions from the proceeds raised from the issuance of S$250m worth of notes in early Jul. Post-acquisition, the aggregate leverage will be ~22%. We assume that the proposed acquisitions will be completed on 1 Nov 2012. We also assume that additional acquisitions totaling ~S$60m closing on 1 Apr 2013 will take place to use up the remainder raised under the issuance of S$250m of notes (blended interest cost of ~5.1%).

Maintain HOLD

We maintain our fair value of S$0.45 and our HOLD rating.

INTEREST EXPENSE LIKELY TO HIT DPU

• Interest expense drag
  
• 2012 new JKT supply manageable
  
• Downgrade to HOLD as px is close to FV
  

Incorporating acquisition assumptions

We have incorporated assumptions into our model about potential acquisitions that may be funded by the S$250m raised by LMIRT in early Jul under its S$750m MTN programme. The S$200m 3-year bonds were priced at 4.88% while the S$50m 5-year bonds were priced at 5.875%, giving a blended interest rate of ~5.1%. Before the acquisitions are completed, we should see a short-term drag on DPU due to the additional interest expense. We anticipate that the acquisitions will be yield-accretive with initial net property yields of ~8.5%. We assume an acquisition of S$100m will be completed on 1 Jan 2013 and an acquisition of S$150m will be completed on 1 Apr 2013.

Good pre-commitment level for 2012 JKT retail supply

According to DTZ, there was no new additional retail space supply for Jakarta in 1Q12. In 2Q12, the 21k sqm Ancol Beach City in North Jakarta brought the total supply to 1.94m sqm in NLA. The total supply growth expected for 2012 is 12.1% YoY, with Kota Kasablanka (82k sqm) and Ciputra World (130k sqm), both located in South Jakarta, forming the rest of the supply. The pre-commitment level for the 233k sqm is 88%, in line with the 2Q12 Jakarta retail market occupancy rate of 87.5%.

Significant supply coming onboard in 2013

LMIRT registers 58% of its portfolio NLA in Greater Jakarta. 16% of the portfolio NLA is located in North Jakarta (Pluit Village), and another 14% is located in South Jakarta (The Plaza Semanggi and Depok Town Square Units). It is worthwhile noting that some 391k sqm of retail space is expected to come to the market in 2013 (DTZ), implying substantial YoY growth of 18.2%, which will likely increase competition.

Downgrade to HOLD

We maintain our fair value of S$0.45 but downgrade LMIRT to a HOLD since the share price is close to our fair value.

POTENTIAL ASSET INJECTION IN THE NEAR TERM

• Occupancy rate at high level
• Strong retail industry dynamics
• Bond issue provides acquisition flexibility

Larger-than-expected impact from forex movement

Lippo Malls Indonesia Retail Trust's (LMIRT) reported 2Q12 NPI of S$30.7m and distributable income of S$17.1m, up 36.2% and 44.3% YoY respectively. Expectedly, the strong performance was driven by full-quarter contribution from Pluit Village and Plaza Medan Fair that were acquired in Dec 2011. DPU for the quarter came in at 0.79 S cents, down from 1.09 S cents as a result of the 1-for-1 rights issue in 4Q11. However, this represents a 14.5% QoQ improvement from DPU of 0.69 S cents achieved in prior quarter. For 1H12, NPI grew 37.1% YoY to S$61.6m, meeting 51.1% of full-year estimate. 1H12 DPU, on the other hand, was down 34.5% to 1.48 S cents, equivalent to 42.9% of our DPU projection. This is slightly below our expectations, due to larger-than-expect impact from unfavourable forex movement.

Outlook remains buoyant

Nevertheless, the portfolio operating metrics and outlook remain buoyant, in our view. As at 30 Jun, LMIRT's overall occupancy rate remained steady at 94.7% vs. 94.5 in prior quarter. This is significantly higher than Indonesia's retail industry average of 86.7%, based on Jones Lang Lasalle's 1Q12 market review report. Management reiterated that Jakarta remains 'under-shopped' and that the retail industry will continue from the robust domestic economy and burgeoning middle class population. This is likely to continue to drive the demand for LMIRT's retail space.

Maintain BUY

We also understand that LMIRT launched two bonds with an aggregate amount of S$250m in early Jul. This leads us to believe that another round of acquisitions may be imminent, given that its financial position was already very strong. While finance expenses may be higher in the immediate term, LMIRT's DPU is likely to be boosted going forward. Gearing post bond issue is expected to remain healthy at 21% (9.3% in 2Q; no refinancing needs till 2014). Maintain BUY on LMIRT with revised fair value of S$0.45 (S$0.43 previously) as we tweak our rental assumptions in FY13-14 to reflect better growth outlook.

AMPLE RESOURCES FOR GROWTH

•Added flexibility from notes issuance

•Retail sales to sustain performance

•Favourable entry point at current price

Notes from MTN programme to provide financial flexibility

Lippo Malls Indonesia Retail Trust’s (LMIRT) financial flexibility and debt maturity profile is expected to be enhanced with the proposed issuance of two fixed-rate notes under its S$750m guaranteed Euro MTN programme. The REIT announced last evening that the S$200m notes and S$50m notes will mature on 6 Jul 2015 and 6 Jul 2017 respectively, and will bear a competitive rate of 4.88% and 5.875% to its existing S$147.5m secured borrowing rate of ~4.6%. This is despite the notes being unsecured obligations of LMIRT. According to the announcement, proceeds will be utilized for corporate funding purposes, including financing acquisitions and asset enhancement works. We believe LMIRT will first use the funds on major refurbishments of Gajah Mada Plaza and Ekalokasari Plaza, as announced in its 2011 annual report.

Good performance likely to be sustained

For FY12, we are positive that LMIRT will continue to perform, given the strong domestic consumption in Indonesia. Real retail sales have consistently been raking in double-digit YoY growth since Nov 2011 (Apr 2012: 10.5%), while the current expectation is that sales will further improve in the following 3-6 months, based on the retail sales survey by Central Bank of Indonesia. This is likely to drive the shopper traffic at its malls and keep its tenant retention rate at high levels (Dec 2011: 80.0%). Already, we note that LMIRT’s portfolio occupancy as at 31 Mar was at 94.5%. This is above the industry average of 87.6%.

Maintain BUY

We continue to like LMIRT for its strong financial position (aggregate leverage at 9.2%, with no refinancing needs until 2014), growth potential and sound industry fundamentals. The unit price has fallen 10.5% from its last peak on 24 Apr in tandem with the broader market, despite the expected resilience from its underlying portfolio. This presents a favourable entry point for investors, in our view. As such, maintain BUY with unchanged fair value of S$0.43.