Investment Thesis – Lippo Malls Indonesia Retail Trust (SGX:D5IU)

Understanding the business

Lippo Malls Indonesia Retail Trust (LMIRT) is a retail Real Estate Investment Trust (REIT) with properties in Indonesia. As of this writing, LMIRT has a portfolio of 30 properties (23 malls and 7 retail spaces) with a combined S$1.9billion valuation. LMIRT is diversified across 3363 tenants and has maintained their occupancy rate at above 90% for the last 9 years. FY2017 occupancy rate was at 93.7% and the annual shopper traffic was at 160m. The company’s Dividends/Distribution policy is based on the REIT requirement to payout/distribute at least 90% of income as dividends (in order to enjoy tax benefits).

LMIRT 10yr results.jpg

Strengths

High dividend yield of 8.6% (based on DPU of S$0.0344 and share price of S$0.40). Even if we assume the tax were to cause DPU to drop to S$0.0319 (figure based on management’s estimate), dividend yield is at 7.98%, which is still pretty high. (Currently, prices trading at S$0.32)

Debt situation is acceptable. Gearing at 33.7% (limit at 45%) with weighted average debt maturity at 2.13 years. Interest coverage ratio is 6 times is very safe (based on EBIT of $137m and interest expense of $27m). Cost of debt at 4.7% (relatively higher than other S-REITs). 63% of its leases will only begin to expire after 2020.

Weighted Average Lease Expiry (WALE) in FY2017 is at 4.1 years, which means that they can enjoy high stability in their rental income.

Shopper traffic has grown 5% yoy and car traffic has grown 4.4% yoy.

Weaknesses

They saw a huge decline in gross revenue and net property income (NPI) during the 2009 recession.

Moody’s lowered the credit ratings of LMIRT into junk territory. See Moody’s withdraws Lippo Malls Indonesia Retail Trust’s credit rating for ‘business reasons’ for more details.

Opportunities

Indonesia’s steady economic growth, growing middle class population and consumption, huge population, and high rate of urbanization is said to fuel expansion in the retail industry in Indonesia. LMIRT is well positioned to take advantage of such opportunities in retail.

Threats

New tax regulations in Indonesia will affect their distributable income. This could potentially mean a dividend cut in the future. See New Tax Regulations Could Impact LMIRT for more details. Note that OCBC and CIMB analysts agree that the effect of these taxes only have a short-term impact on stock prices but long term opportunities are still attractive.

Highly susceptible to exchange rate changes. Indonesian Rupiah (IDR) has weakened against Singapore Dollars (SGD) for last 10years, affecting distributable income.

Threat to retail malls from rapidly growing e-commerce sector in Indonesia. See E-commerce in Indonesia: A guide for Australian business and E-commerce Overview in Indonesia for more details.

Valuation

Current market price at $0.315, dividends (based on TTM) at $0.0322. Dividend yield at 10.2% which is way higher than my required yieldof 6%. The huge discount in stock price against dividends might be due to fears over future dividends.

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(Source: sginvestors.io, accessed 09 June 2018)

OCBC’s last target price for LMIRT is at $0.31 with a SELL rating. Both analyst firms are viewing the current stock price as undesirable despite the high dividends yield.

I intend to have some holdings of the stock but I am thinking of starting only a minor position and waiting to see how much their dividends are affected by the tax regulations. I consider the long term prospects of the business as attractive for the given dividend yield.

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