Lippo Malls Indonesia Retail Trust - CIMB Research 2018-04-12: Pressing The Re-set Button

Lippo Malls Indonesia Retail Trust - CIMB Research 2018-04-12: Pressing The Re-set Button LIPPO MALLS INDO RETAIL TRUST D5IU.SI

Lippo Malls Indonesia Retail Trust - Pressing The Re-set Button

  • Changes in Indonesian income tax regulations would erode Lippo Malls Indonesia Retail Trust (LMIR Trust)’s earnings.
  • Impact from weak rupiah could persist.
  • Long-term growth story intact, short-term drag from earnings reset from structural tax changes.
  • Downgrade to REDUCE with lower DDM-based Target Price of S$0.33.

Higher tax expenses from tax changes 

  • LMIR Trust announced that with the implementation of Indonesia's Regulation 34 of 2017, from 2 Jan 2018, all income earned from land or building leases in Indonesia will be subjected to a 10% tax on the gross amount paid, including service and utilities recovery charges. 
  • Previously, property owners are not liable to pay income tax on such charges; they are paid by tenants to a 3rd party operator appointed to manage and maintain the property. Following this, tenants are required to withhold income tax on such charges.

High single-digit erosion in earnings 

  • Based on its pro-forma assessment, LMIR Trust indicated that its FY17 distributable income could erode by c.7% from this new tax treatment. Post this change, LMIR Trust intends to take property management activity in-house. 
  • While LMIR Trust will take time to put the system in place, we anticipate this change to take place in FY18F. Hence, we tweak our projected revenue to reflect the inclusion of service/utilities recovery charges from 2HFY18F onwards as well as adjust our DPU to take into account the additional tax expense.

Further lowering our rupiah assumption 

  • We further lower our rupiah to SGD exchange rate assumption to 10,300 (vs. 9,450 previously). The rupiah has depreciated against the S$ by c.12% since Dec 2016. LMIR Trust uses currency option contracts to hedge c.85% of its rupiah quarterly cashflow. 
  • In Feb 17, it put in place two-year currency hedges (till Feb 2019). As the hedges roll off, we believe the continued weakness in the rupiah could likely have an adverse effect when LMIR Trust converts its distributions into S$.

Long-term growth story intact, short-term drag from earnings reset 

  • All in, we lower our FY18/FY19 DPU projections by 26.3%/26.6% to factor in higher tax expense and weaker rupiah assumptions. 
  • We continue to find LMIR Trust’s long-term growth story of exposure to the rising urbanisation and growing middle-class consumption still intact. However, in the near term, this earnings erosion from higher taxes is likely to be a drag on its share price performance.

Downgrade to REDUCE 

  • LMIR Trust’s share price has been trading at the upper end of its 6-year historical valuation range and we anticipate the stock to retrace to average valuation levels. Hence, we downgrade our recommendation to REDUCE, with a lower DDM-based target price of S$0.33 (cost of equity unchanged at 10.5%). 
  • Key downside risk is the continued weakness in rupiah while accretive new acquisitions and higher-than-expected rental reversions are upside risks.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | 2018-04-12
CIMB Research SGX Stock Analyst Report REDUCE Downgrade HOLD 0.33 Down 0.430