Lippo Malls Indonesia Retail Trust - CGS-CIMB Research 2018-08-03: Higher Cost And Taxes Continue To Drag

Lippo Malls Indonesia Retail Trust - CGS-CIMB Research 2018-08-03: Higher Cost And Taxes Continue To Drag LIPPO MALLS INDO RETAIL TRUST SGX:D5IU

Lippo Malls Indonesia Retail Trust - Higher Cost And Taxes Continue To Drag

  • Lippo Malls Indonesia Retail Trust (LMRT)’s 2Q/1H18 DPU of 0.59 Scts/1.26 Scts makes up 23%/48% of our FY18 forecast.
  • The lower 2Q NPI margin of 82% was due to higher operating and other expenses.
  • Rental reversions continue to average a positive 4.2% in 2Q.
  • Gearing of 36% provides some debt headroom for new acquisitions.
  • We upgrade LMRT from Reduce to HOLD on valuation with an unchanged Target Price of S$0.33.



2Q results summary

  • Lippo Malls Indonesia Retail Trust (LMRT) reported a 5.5% rise in 2Q gross revenue to S$52.7m, with the inclusion of service charge and utilities recovery fees. However, gross rental income was marginally lower y-o-y, dragged by a weaker rupiah against S$ and expiry of master leases for seven retail spaces, partly offset by income contributions from three new acquisitions made in 2017.
  • 2Q DPU of 0.59 Scts is 34.4% below 2Q17 on the back of lower NPI margin and higher effective tax rate as well as increased perpetual securities distributions. 1H18 DPU of 1.26 Scts makes up 48% of our FY18 forecast, which we deem in line.



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NPI margin affected by higher costs

  • Lippo Malls Indonesia Retail Trust (LMRT)’s 2Q NPI margin declined to c.82% (93.8% in 1Q17) due to additional property operating and maintenance expenses as well as doubtful debt allowance of S$1.2m. 
  • With the new tax treatment for outsourced service and utilities recovery charges, LMRT’s effective tax rate rose to 35.9% in 2Q18 compared to 28.9% a year ago. We expect the effective tax rate to remain elevated going forward.


Organic rental reversions remain positive

  • Lippo Malls Indonesia Retail Trust (LMRT) renewed an estimated 5% of portfolio space in 2Q18 at a positive 4.2% rental reversion, with portfolio occupancy remaining high at 93.6%.
  • LMRT has a remaining 10% and 12% of leases to be re-contracted in 2H18 and FY19.


2Q18 gearing of 36%

  • Lippo Malls Indonesia Retail Trust (LMRT)’s gearing stood at 36% at end-2Q and average cost of debt (excluding perpetuals) is 4.95%. It has c.S$305m of borrowings to be refinanced in FY18, of which an S$100m bond issue is due in Nov 18. The trust is in the advanced stages of refinancing negotiations and cost of funds is anticipated to stay relatively stable. Based on an assumed gearing ceiling of 40%, LMRT would likely have debt headroom of c.S$80m to fund new purchases.
  • While LMRT could explore inorganic growth to boost earnings, its current cost of capital of 8-8.5% could mean modest accretion in the near term.


Upgrade on valuation

  • Our FY18-20F DPU and DDM-based Target Price of S$0.33 are intact.
  • Key risk to our view is the continued weakness in the rupiah vs. S$. The effective 2Q and 1H exchange rate was Rp10,459 and Rp10,367 vs. our assumption of Rp10,300=S$1.
  • Lippo Malls Indonesia Retail Trust (LMRT)’s share price has corrected significantly since our downgrade call in Apr. Hence, we upgrade LMRT from Reduce to HOLD.
  • Downside risks include forex weakness that will have an adverse impact when LMRT converts its rupiah distributions into S$.
  • Upside risk could come from accretive new acquisitions.





LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-03
SGX Stock Analyst Report HOLD Upgrade REDUCE 0.330 Same 0.330



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