Earnings Commentary: LMIRT’s Indonesian Boost

Being ranked as the fourth most populous nation with over 246 million people, Indonesia has no doubt, been an eye-catching retail market. Lippo Malls Indonesia Retail Trust (LMIRT) is perhaps a testament of the retail potential of this huge domestic market. In its FY12 earnings, the trust reported a relatively robust set of numbers.

The Numbers
Gross rental income for the fourth quarter ended 31 December 2012 grew 35.4 percent as LMIRT begun to reap dividends from its purchase of Pluit Village and Plaza Medan Fair back in 4Q11. To a certain extent, the recent acquisitions of six other properties also helped to boost top line figures.

In particular, LMIRT remained a beneficiary of Indonesia’s growing middle class as shopper traffic increased across its malls. LMIRT reported an occupancy rate of 93.5 percent as at 4Q12, well above Indonesia’s average retail industry rate of 88.1 percent.

Coupled with a recognition of miscellaneous income (derived from gains from litigation and rental of equipment to a third party operating company), LMIRT recorded a 41.5 percent jump in distributable income.

LMIRT’s Sponsor Provides Ready Pipeline
In a phone interview with Bloomberg, PT Lippo Karawaci’s (LMIRT’s sponsor) President Director Ketut Budi Wijaya said that by 2015, PT Lippo plans to have finished building about 15 new malls.

Besides Jakarta, PT Lippo intends to develop malls beyond the capital in a bid to capitalise on the growing middle class. Of the 15 malls it plans to build, half will be located in cities such as Semarang in north Java, Denpasar in Bali and Manado in north Sulawesi province.

Dubbed as a “cornerstone” of PT Lippo’s third pillar of growth, LMIRT has been accorded first-right-of-refusals for PT Lippo’s new malls. With these new malls forming a ready pipeline of possible acquisitions, LMIRT seems well-placed to achieve its stated goal of building a $4 billion portfolio over the next three to five years.

A Sound Footing
Besides having a readily available pipeline of new malls for acquisition, LMIRT also boasts a sturdy balance sheet as well as diversified funding sources.

Even as debt levels increased to about $472.5 million at the end of 2012, LMIRT was still able to maintain a gearing level of around 24.5 percent, below the statutory limit of 35 percent for S-REITs. In addition, LMIRT mentioned in its results press release that it has around $1.1 billion worth of assets which are unencumbered (meaning it can use these assets as collaterals for debt). This provides the trust with financial flexibility in funding.

In sum, these provides a sound footing for LMIRT to take advantage of its sponsor’s pipeline as well as other third party acquisitions.

Looking Forward
The Indonesian government recently announced an increase in minimum wages across Indonesia this year. The highest increases have been planned for the capital, Jakarta – an increase of around 44 percent. The increase in minimum wages could help to propel consumer spending. The latest retail sales figures for Indonesia showed year-on-year growth of around 17 percent in November 2012.

With domestic consumption accounting for around 60 percent of total GDP growth, Indonesia remains isolated from external shocks and thrusts the country to the peak of economic heights in the Southeast Asian region.

The growing sales figures have also provided some impetus for upward rental reversions with the company’s management expecting rentals from most tenants to rise around 5 percent annually.

Inclusive of the recently announced dividends ($0.0074 versus 4Q11’s $0.0053), and based on 13 February’s close of $0.525 apiece, LMIRT’s dividend yield would equate to a respectable 5.6 percent.

Also worthy of note is that the counter has already appreciated 5 percent this year, as of 13 February’s closing price of $0.525, outperforming the broader Straits Times Index’s 4.08 percent appreciation. Perhaps there is still time for the investor to tap into the Indonesian retail market proxy, LMIRT.