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LMIR: Foreign exchange forward contracts.

Friday, November 5, 2010

LMIR reported stronger earnings for 3QFY2010. Distributable income at $11.7 million. DPU at 1.09c is higher than the 1.04c in the last quarter. This represents a marginal increase of 4.8% over the previous quarter despite revenue increasing 53% year on year. LMIR also managed to have rate increase in rental renewals to the tune of 16%! Indonesia is doing well, as I expected.

Unfortunately, the management lost $2.9m in foreign exchange forward contracts. Without these contracts, the distributable income would increase by 24%! A DPU of 1.35c for an annualised DPU of 5.4c? Now, that would be in line with its actual performance on the ground!

The management is singing the old tune that these contracts are a prudent measure to protect its income denominated in the Indonesian Rupiah. The very strong Rupiah has caused it to lose money quarter after quarter on these contracts. Who is making money, I wonder?

What do they expect from an economy that actually weathered the last financial crisis unscathed? Indonesia was one of only three Asian economies that did not go into a recession, the other two being China and India! These contracts should have been reduced significantly in the last three quarters! I have wondered on various occasions why the CFOs of LMIR could never last very long. Did they go against the idea of having foreign exchange forward contracts? I keep wondering.

Having said this, the REIT remains a relatively safe investment that should generate consistent income for unitholders although its inability to deliver significantly higher DPU is galling, given such impressive growth in revenue.

Related post:
LMIR: DPU reduced 20%.


mark said...

While aussie aint part of asian, it is interesting to note that they didnt go into recession either.

Have u ever considered opening an account there and put money into the savings account? Have u seen their interest rates for SA? This is aside from their FD rates even.

AK71 said...

Hi Mark,

It could be a good idea for people who have no interest in investing in the stock market but the Aussie FD interest rates are not attractive enough for me.

My returns are higher investing in certain Singapore REITs. ;)

mark said...

I am not referring to FD. I am referring to SA. FD has a lockup period which i dislike.

I like the idea of earning 6-6.5% while I consolidate money and accumulate warchests. 6.5% compared to 0.125% is a lot of difference. That said u need to find a way to have ready access to the bank accounts.

REITs included.. there is a time to sell. At the top of the bull and trough of the bear, it could take years to complete.

I am trying to answer the question of where to put one's money after liquidating in a bull market while waiting for the bear market to do its work? Remember, we have only so few cycles in our lifetime to utilize such cycles properly. I've just missed one. The next one, I plan to 'whack'!

In brief, - I am not referring to putting money in an aussie SA in lieu of the market picks.

Everyone who drives a car, will need a car park. U cannot drive on forever. The question is, where shall I park my car?

mark said...

Oh yeh just to add, the caveat for an aussie account is, you need to be a resident there (not necessarily PR/Citizen), else u find someone who is and hopefully u can trust the person. :P The rate is worth enough to consider this, although the next step would be to consider how much u intend to put in there. Unless I liquidate my portfolio I doubt it will be worth the while. My 6-10% can be gathered from.. say... trading.

AK71 said...

Hi Mark,

Thanks for clarifying your comments.

Having money in a foreign currency, we have to take into consideration exchange rate fluctuations. How will S$/A$ perform in future? I cannot see that far.

Furthermore, having to entrust my hard earned money to someone who is a resident of Australia is somewhat difficult for me. ;p

I have no problem keeping cash in Singapore. Furthermore, can we be sure that the low interest rate environment we see now in Singapore would not change?

I, for one, am willing to bet that interest rates would go up in time. When? I do not know. ;)

mark said...

Hmm I cant see the interest rates here being comparable to that of the aussies. If IR here does become 6%, needless to say what the aussie IR would be. The aussies do need that interest rate and u can see why when u look at the bigger picture. Yes I consider currency fluctuations which is why i dont do FD or TD. I havent actually gotten the amount which makes it worth the while. I do have something which u dont, which is family back in aussie.

It is unfortunate that quite a few things I want to buy online is demoninated in aussie dollar rather than USD.

I also found out bout script lending. U can check it out via CDP website too. U will still get your dividends.

Basically. u opt to lend CDP the scripts. Whether or not it is ultimately lent out, depends if there are any takers. U can sell your stocks as per usual.

Thats why shortists know that their positon may be forced closed anytime if the owner takes back their scripts.

AK71 said...

Hi Mark,

I am not accomplished enough in Economics to see anything with certainty but let me try to hazard a guess.

I understand that the very low interest rate environments in Japan and the USA are to stimulate borrowing and growth.

In Singapore, the very low interest rates being paid on deposits right now cannot continue forever. It has to go up at some point. Singapore's economy is doing very well.

If this happens, would Australia's interest rate be even higher? I do not think there is a relation.

Australia's interest rate would remain high and go higher if inflationary forces need reigning in.

There is talk of a property bubble in Australia for a while now. What would happen if the bubble bursts? Exactly what happened in the USA, I guess, and that is a lowering of interest rate to reduce hardship for its people.

Hey, thanks for sharing information on lending scripts to CDP. Will look into it sometime. :)

mark said...

No there is no corelation, but do you reckon their rates will drop while ours go higher? I cannot see SG's rates equal that of the aussie anytime soon. The fundamentals are different, but the net outcome is what drives interest, does it not?

Their inflation can be sparked by quite a few things. The last major one while I was there, was literally because of bananas. Yes, the fruit.

The feds dont mind driving down the USD. Or so the articles claim. To make the rates so miserable, that people are literally forced to spend and park their money in riskier assets.

Yes maybe SG's saving rates will go up but I will be very surprised if it can climb to half of 6%. I've given up totally on those rates. In order to beat inflation one might have to turn to other ways, eg SRS. Put money in there, save a little on tax while using that amount to invest (at the right time hopefully). The catch is of course, you can't just get cash out as and when you would want, and depending on age, with or without penalty.

As for property bubble, putting that aside I would be more interested to see how they stayed away from entering recession. How, why, and once again, the catch.

AK71 said...

Hi Mark,

Interest rates fall under monetary policy. It is used to regulate the flow of money in the economy. Higher interest rate tightens money supply. Lower interest rate loosens money supply.

So, if there is inflation and the economy is overheating, a higher interest rate is sensible. If there is deflation and the economy is in the doldrums, a lower interest rate is desirable. That is textbook material.

Now, how will all of that translate into reality? I do not understand Australia's economy as well as I would like to. So, I cannot comment with any amount of certainty where I think its interest rate would go.

If I don't understand something, I should not touch it. This is something I should always remember.

As for Singapore, the government is fearful of inflation and the hardship which it might bring. It has allowed the S$ to appreciate to ameliorate inflationary pressures.

However, a low interest rate environment does almost nothing to curb the demand for loans. A higher interest rate environment is the answer to slowing down inflation in any meaningful manner.

Hence, I believe it is a matter of time before interest rate here would rise. How much would it rise? I have no idea but rise it would.

Where would I park my money while waiting for the next bear market to run its course? Frankly, I have not thought it out but I guess I will cross the bridge when I come to it. :)

left_ray said...

Management continue to disgust me with their foreign exchange forward contracts. They better show some profit in future.

AK71 said...

Hi left_ray,

A significant growth in DPU could materialise if the foreign exchange forward contracts were axed. This does not seem likely in the near future, however.

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