Lippo Malls Indonesia Retail Trust - OCBC Investment 2016-08-05: Maintain BUY with S$0.40 FV

LIPPO MALLS INDO RETAIL TRUST D5IU.SI

Lippo Malls Indonesia Retail Trust - MAINTAIN BUY WITH S$0.40 FV

Lippo Malls Indonesia Retail Trust’s (LMIRT) 2Q16 results were within expectations.

DPU increased 16.4% YoY to 0.85 S cents, making up 27.8% of our full-year forecast.
1H16 DPU makes up 54.9% of our full- year forecast. 2Q gross revenue increased 10.8% YoY to S$46.8m, or 27.2% of our FY16 forecast, mainly due to the acquisition of Lippo Plaza Batu and Palembang ICON in July 2015 as well as positive rental reversions within the existing malls.
Rental reversions are still positive at 6.3%, albeit at a lower pace than last quarter’s 7.5%.
Portfolio occupancy was recorded at 94.8% in 2Q16, close to the 94.7% recorded in 1Q16.

The outlook for Indonesian retail continues to look positive.
Colliers 2Q16 Retail Report for Jakarta mentioned Courts, Lotte, Jysk, Uniqlo, IKEA, and H&M as brands with expansion plans in Indonesia.
For FY17, we still expect positive organic DPU growth, but at milder rates given the already high portfolio occupancy and trend of more muted rental reversions.
For FY18, we see a risk of occupancy and rental reversion headwinds in FY18 as the annual retail supply is projected to increase by ~4% in Central Jakarta and by ~12% in Greater Jakarta (BoDeTaBek) according to Colliers.
Out of LMIRT’s 19 retail malls and 7 retail spaces, 10 malls and 3 retail spaces are located across Greater Jakarta. LMIRT’s lease expiry profile looks favorable given this forecast: only 12% of LMIRT’s leases by NLA are due for expiry in 2018; ~40% of LMIRT’s leases by NLA expire in 2020 and beyond.

After lowering our risk-free rate from 3.0% to 2.4% and adjusting our beta downwards to reflect the broadly favorable retail conditions in Indonesia, our cost of equity assumption drops from 8.7% to 8.4%. As a result, our DDM-derived fair value increases from S$0.35 to S$0.40.
As of yesterday’s closing price, LMIRT is currently trading at a blended FY16/FY17 yield of 8.5%. The gearing ratio currently stands at 35.7% as at 2Q16.
We maintain our BUY rating.

Deborah Ong OCBC Securities | http://www.ocbcresearch.com/ 2016-08-05

OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 0.40 up 0.35