Lippo Malls Indonesia Retail Trust - CGS-CIMB 2018-05-04: Drag From Higher Costs And Taxes

LIPPO MALLS INDO RETAIL TRUST SGX: D5IU

Lippo Malls Indonesia Retail Trust (LMRT) - Drag From Higher Costs And Taxes

Lippo Malls Indonesia Retail Trust 1Q18 DPU of 0.67 Scts is in line, making up 25.4% of our FY18F forecast.
Lower bottomline due to higher operating costs and taxes.
Enjoyed positive rental reversion of 5.3% in 1Q18, Indonesia retail sector remains attractive.
Key risk to DPU projections is a weaker-than-projected rupiah vs. S$ rate.

Lippo Malls Indonesia Retail Trust (LMRT) saw a 1.1% y-o-y increase in 1Q18 gross revenue to S$49.1m, thanks to additional income from three new assets purchased last year. This was partly offset by the weaker rupiah as well as lower income from non-renewal of master leases for 7 retail spaces within the portfolio.
However, NPI and distribution income slipped 4.6% and 24.3% y-o-y respectively on higher costs as well as increased tax liability following the introduction of new tax regulations since Jan 218.
1Q18 DPU fell 24.7% y-o-y to 0.67 Scts.

1Q18 NPI margin declined to 89.5% (94.8% in 1Q17) due to additional maintenance and operational costs of the retail spaces and Kediri Town Square, purchased last year, and doubtful debt allowance of S$0.74m.
With the new tax treatment on outsources service charges and utilities recovery charges, LMRT will no longer outsource the operational management of the malls to a third-party vendor. We have included the impact of higher service/utilities recovery charges into our projections from 2HFY18 onwards.

The trust renewed 7,912 sqm of space at a positive 5.3% in 1Q18 and maintained high portfolio occupancy of 94%.
In the longer run, outlook for the Indonesia retail sector remains attractive with the rising middle-income population. This bodes well for the remaining 15% and 10% of lease expiries for the remainder of FY18 and FY19. We think the trust will be able to continue to enjoy reversions of +2-3% for the upcoming renewals.

Average cost of debt (excluding perpetuals) is at 4.59%, and 46.8% of its loans are on a fixed rate basis. It has a total of S$280m of borrowings due to be refinanced in FY18. With the current rising interest rates, we think LMRT’s overall cost of funds could trend a little higher post refinancing, in our view.
LMRT’s gearing stood at 35% at end-1Q18, still within the gearing ceiling of 45%. While LMRT could explore inorganic growth to boost earnings, current cost of capital of c.8% could mean modest accretion in the near term.

We leave our FY18-20F DPU and DDM-based Target Price of S$0.33 unchanged.
Key risk to our view is the continued weakness in the rupiah vs S$. Our current projections assume an average rate of S$1:Rp10,300.
LMRT’s current in-place 2-year currency hedges are expected to roll off in Feb 19. The present weaker Rp will likely have an adverse impact when LMRT converts its rupiah distributions into S$. Hence, we keep our Reduce call.
Upside risk could be an improvement in the rupiah rate or accretive new acquisitions.

LOCK Mun Yee CGS-CIMB | YEO Zhi Bin CGS-CIMB | https://research.itradecimb.com/ 2018-05-04

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