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LMIR: 1Q 2014 DPU 0.68c.

Monday, May 5, 2014

There isn't much to say about LMIR's results but this is a quick blog post in response to a guest blogger's request. (Hey, you know who you are and I am still waiting for your next guest blog, ok? LOL.)

In my last blog post on LMIR, I said that:

"... we are likely to see DPU in S$ terms recovering in the next quarter as financial expenses normalise and I have estimated that a DPU of 0.66c is realistic."

Well, LMIR has done a bit better and declared a DPU of 0.68c for the quarter. Making the assumption that all things remain equal, at 41c a unit, we are looking at a distribution yield of 6.63%.

Now, I would ask the question that with the issues which investors in LMIR have to accept, is 6.63% attractive enough?

Issues? What issues?

I am going to be lazy. If you cannot remember, you might want to read this blog post again:
LMIR: Gearing ratio and margin of safety.

As an investment for income, I feel that LMIR can only become attractive again if the Rupiah appreciates meaningfully. When is that going to happen? Your guess is as good as mine.

In the meantime, if I were to put more of my money in LMIR, I will have to demand a much higher distribution yield than 6.63%.

See 1Q 2014 presentation slides: here.


sillyinvestor said...

Hi AK,

I think Lippo did ok given that rental guarantee for the biggest mall/ flop oops :p is over, but did not make a big dent to gross rent. It's about 2 million per quarter, think occupancy has improve further now.

But u are right, with sub7 yield, not difficult to find alternatives. But as least I dun feel like I am on sinking ship.

AK71 said...

Hi Mike,

Although I sold a large chunk of my investment in LMIR early last year, I am still very much invested in the REIT. So, I am on the same ship.

For sure, it is not sinking, just somewhat damaged and sailing at a much slower speed. ;p

JJ See said...

Hi AK,

LMIR can only become attractive again if the Rupiah appreciates meaningfully. I agree with you on this, but by then it might not be the best time to enter.

On gearing ratio and margin of safety, the gearing ratio has dropped to 26.7% and its currently priced at a discount to NAV. If the discount is too huge, what will usually happen is the main shareholder will try to take it private like some of the cases we see.

Some investors are worried with foreign exchange issues and only invest in companies which revenue mainly come from Singapore. If its only about Singapore, there will be a ceiling and constrained by Singapore size.

AK71 said...

Hi JJ,

Well, I rather not take a gamble.

If the Rupiah should decline further in value, then, gearing level could go up as property values would also decline in S$ terms. The discount to NAV would also narrow. Can we be sure that the Rupiah will not weaken further?

With the US tapering on QE going on and a possibly higher interest rate environment in the US come mid 2015, there could be a renewed round of weakness for some emerging economies' currencies including the Rupiah.

So, we have to ask if the 6+% distribution yield from LMIR is enough to compensate for the risk of being invested?

JJ See said...

Hi AK,

If you compare with some defensive stocks at 4-5% or fixed deposit at 1.1-1.4% or structured deposits at around 2%, around 6+-7% yield still give a decent buffer.

The market already factored in the tapering and increased in rates in last year REITs and emerging markets currencies bloodbath.

The interest rates for the loans are already fixed, just that the loans are in SGD, hence I will assume the management will be good enough to do some currency hedging to counter this.

If their currency come down, their exports should do well which lead to better job market and opportunities. Thus many people will reach middle class status and increased in consumption. Indonesia is in fact the fourth largest country on earth (behind just China, India, and the US.) In forex issues, the worst scenario is currency devaluation.

At current low level of interest rates, too much or wide of discount to NAV is not really good for minor investors because main shareholder might attempt to bring the company private at a discount price.

AK71 said...

Hi JJ,

Well, we have to compare apples with apples.

REITs distribute 90% to 100% of their cash flow to unit holders. In so doing, if LMIR is only able to provide a distribution yield of 6+%, I think it is hardly attractive, especially taking into consideration that part of the distribution is a return of capital. There are stocks which are able to provide that kind of yield with only a 40% to 70% pay out ratio, retaining earnings for growth.

So, given a choice, which one would we invest it?

Of course, there is nothing wrong with investing in REITs for the purpose of diversification. In fact, this is a good thing to do.

If you are comfortable with increasing your long position in LMIR, weighing all arguments for and against, you should do it. Of course, you would do very well in the event that the Rupiah recovers its strength. :)

JLee said...

one thing that puzzle me is the interest expense is higher even though they have less debt to pay. their reason is that it is due to medium term note issued in Oct 2013.

Overall debt compared to Q1 2013 is down as well.

AK71 said...

Hi JLee,

Sounds like you might want to send the IR department an email to clear things up. Please share with us your findings. ;)

AK71 said...

The Singapore dollar has been gaining ground in recent week, pushing below S$1.25 to the US dollar and hitting eight-month highs.

Currency analysts say they expect the central bank to keep its monetary policy despite expectations of a hike in US interest rates.

Meanwhile, the Singapore dollar has been holding up against other regional currencies even as some of them experience volatility against the greenback.

"Our neighbouring Southeast Asian currencies, for many of them the dollar range has moved higher. But we have maintained the same range. In fact, if you average the currencies of most of our trading partners, you find we are actually aligned. Most of them have been fluctuating together with the average value of most of our trading partners,” said Philip Wee, senior currency economist and executive director of economy and currency research at DBS Bank.

“Our trade-weighted appreciation really came from us maintaining the stability despite the shocks that we get in the Japanese yen, the Indian rupee and the Indonesian rupiah. So what this tells you is that our currency is aligned… for competitiveness reasons but at the same time we are pretty insulated from global shocks."

Looking ahead to the second half, experts believe the Singapore dollar will continue to hover between the ranges of S$1.20 to S$1.25.

AK71 said...

An increase in the Fed funds rate would make US assets more attractive, a situation that would trigger capital outflows and increase global demand for dollars, which could hurt currencies in emerging economies, including Indonesia.

On the domestic side, bearish sentiment surrounding the rupiah is also stoked by the likelihood that Indonesia will see only minor improvement in its external balance.

The France-based bank predicted the rupiah would weaken to 12,250 against the dollar in the first six months next year, before falling further to 12,800 by the end of the year as the US central bank would start hiking its key interest rate in the second half of 2015.

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