Lippo Malls Indo Retail Trust (LMIRT) - OCBC Investment 2017-08-07: A Few Hiccups Ahead

Lippo Malls Indo Retail Trust (LMIRT) - OCBC Investment 2017-08-07: A Few Hiccups Ahead LIPPO MALLS INDO RETAIL TRUST D5IU.SI

Lippo Malls Indo Retail Trust (LMIRT) - A Few Hiccups Ahead

  • FY17F yield of 7.4%.
  • FV drops to S$0.45.
  • Fairly valued.

2Q17 DPU increased 5.9% YoY 

  • Lippo Malls Indonesia Retail Trust’s (LMIRT) results were within expectations. 2Q17 total revenue increased 6.6% YoY to S$49.9m on the back of a 10.5% YoY increase in gross rental income to S$41.9m. NPI grew 8.6% to S$46.8m.
  • 2Q17 DPU increased 5.9% to 0.9 S cents or 26.3% of our initial full-year forecast while 1H17 DPU increased 6.5% YoY to 1.79 S cents or 52.2% of our initial full-year forecast. 
  • The REIT recorded rental reversions of 13.0% for leases renewed this quarter, up from the 7.5% recorded in 1Q17.

Revising rental reversion estimates for FY17F 

  • We were initially optimistic on rental reversions for anchor tenant leases expiring in late 2017, which had been signed ten years prior during the IPO year, as was suggested by our interactions with the previous management. 
  • The new management has taken the effort to clarify that market rents are significantly below the expiring rents for these anchor tenant leases, and we have adjusted our rental reversion assumptions accordingly. We now assume a -25% rental reversion rate for 10% of LMIRT’s leases by NLA, which are due to expire at the end of this year.
  • Less significantly, we also note that the land leases for Java Supermall units and the Mall WTC Matahari units are due to expire on 24 Sept 2017 and 8 April 2018 respectively. Together, the assets made up 0.8% of LMIRT’s portfolio valuation as at end-2016 and contributed 1.9% of NPI in FY16. 
  • To be conservative, we assume these land leases will not be renewed in our valuations.

Long-term growth story intact; look for better entry point 

  • After the adjustments above, our DPU estimate for FY17 drops stays at 3.4 S cents, while that for FY18 dips from 3.4 S cents to 3.1 S cents.
  • Taking into account our new DPU forecasts, our DDM-based fair value dips from S$0.475 to S$0.45
  • Looking forward to the next few years, we continue to find LMIRT’s long-term growth story compelling given its exposure to Indonesia’s urbanization and rising middle-class expenditures. 
  • Nonetheless, current unit prices could be more attractive. Against last Friday’s closing price, LMIRT is trading at a FY17F dividend yield of 7.4%. Given the recent appreciation in unit price, we downgrade LMIRT from Buy to HOLD.

Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2017-08-07
OCBC Investment SGX Stock Analyst Report HOLD Downgrade BUY 0.45 Down 0.475