Lippo Malls Indo Retail Trust: Acquisitions to accelerate growth (OCBC)

Slightly below expectations. Lippo Malls Indonesia Retail Trust's (LMIRT) 3Q11 DPU of 1.06 cents was slightly below our expectation due to higherthan- \expected tax expense. However, gross revenue of S$33.3m (-1.4% YoY) and NPI of S$22.5m (+1.2% YoY) were ahead of our projections, notwithstanding a negative impact from a depreciating IDR against SGD. In IDR terms, we note that gross revenue and NPI would have grown by stronger 3.3% and 6% YoY, supported by a steady flow of shopper traffic and growing urban middle-class catchment population. For 9M11, revenue of S$99.2m and DPU of 3.32 S cents formed 78.9% and 71.6% of our fullyear revenue and distribution figures, respectively.

Fundamentals remained sound. Overall portfolio occupancy as at 30 Sep was healthy at 98%. This remained unchanged from the rate seen a quarter ago, but compared favourably to the 3Q11 industry average of 85.7% (Source - Colliers International). Debt-to-asset ratio was also at a low 10.1% (end Jun: 10.2%), providing the group ample funding capacity for future acquisitions. On 28 Sep, we note that LMIRT had secured a new term loan facility of up to S$200m with an all-in margin of 5.2% (lower than cost of debt of 6.5% as at 30 Sep) to refinance its existing S$125m loan which will mature in Mar 2012. With that, the group's debt maturity will be extended to 2014 with no refinancing requirements over the next three years.

Acquisition to fuel growth. Further to the announcement on the proposed acquisition of Pluit Village and Plaza Medan Fair and rights issue on 30 Sep, management had also received approval from unitholders at the EGM convened on 20 Oct. As a recap, LMIRT proposed a one-for-one renounceable rights issue at an issue price of S$0.31 apiece to raise ~S$337m to partially fund the purchase consideration of S$388m. We view this positively as the acquisitions were expected to be DPU yield accretive and were done at a discount of 4.1-5.7% to their average valuations. According to management, the investments are likely to boost its distributable income by 61% from S$47.9m seen in FY10, while its adjusted DPU yield would increase to 8.43% from 8.38%.

Reiterate BUY. We factor in the contributions from the two new malls and rights issue, as the acquisitions are expected to complete on 9 Dec. Using the Dividend Discount Model, our fair value is now adjusted from S$0.61 to S$0.45. Looking at an attractive potential upside of 26.3%, we maintain our BUY rating on LMIRT.