SINGAPORE (May 7): CGS-CIMB Securities is maintaining its “reduce” call on Lippo Malls Indonesia Retail Trust (LMIRT) with a target price of 33 cents.
This came on the back of the trust reporting a 24.7% drop in its 1Q18 DPU to 0.67 cent compared to 0.89 cent last year, as well as a lower y-o-y distributable income of $19 million.
In terms of INR, the group’s total gross revenue increased 10.3% y-o-y to Rp504.0 billion, but in SGD terms, it only rose 1.1% to $49.1 million.
The management attributes this to the weakening of INR against SGD, as well as higher property expenses and an increase in income tax as a result of the new tax regulation passed by the Indonesian government.
See: LMIR Trust reports 24.7% fall in 1Q DPU to 0.67 cent on weakening rupiah, new tax
See also: New tax regulations in Indonesia could impact LMIRT
NPI margin during the quarter declined to 89.5% compared to 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 $0.74 million.
With the new tax treatment on outsources service charges and utilities recovery charges, LMIRT will no longer outsource the operational management of the malls to a third-party vendor.
In a Friday report, analyst Lock Mun Yee says, “We have included the impact of higher service/utilities recovery charges into our projections from 2H18 onwards.”
Nonetheless, the trust renewed 7,912 sqm of space at a positive 5.3% in 1Q18 and maintained high portfolio occupancy of 94%.
The analyst believes that in the longer term, the outlook for Indonesia’s retail sector remains attractive with the rising middle-income population, which will bode 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,” says Lock.
Currently, the trust has an average cost of debt (excluding perpetuals) of 4.59%, while 46.8% of its loans are on a fixed rate basis. It also has a total of $280 million of borrowings due to be refinanced in FY18.
Lock believes that with the current rising interest rates, the trust’s overall cost of funds could trend a little higher post financing. And while the trust could explore inorganic growth to boost earnings, its current cost of capital of about 8% could mean modest accretion in the near term.
As at 3.15pm, units in LMIRT are trading at 32 cents, or 1.0 times FY18 book with a dividend yield of 8.0%.
