Lippo Malls Indonesia Retail Trust - Is 8.1% Yield A Good Investment?

A reader emailed me asking about Lippo Malls Indonesia Retail Trust. Is it a good time to buy now? Base on FY2014 DPU, the yield works out to be 8.1% at the price of 0.34. The yield is definitely quite high and seems like an attractive investment. I got interested in it and took a good look at the company's financial statement. I'll share with you my findings below.

Introduction to Lippo Malls Indonesia Retail Trust

Before I dive deeper into the financial analysis of the company, here's a short introduction of the company. Lippo Malls Indonesia Retail Trust owns 16 retail malls in Indonesia with 6 of them in the capital city, Jakarta. I went to Jakarta in December 2014 and visited a few of these malls during my trip. I took pictures of this particular mall located at the North of Jakarta near to the coastline.

It was Christmas time and they were having some Christmas events there. The malls of Lippo Mall are like the suburban malls we have in Singapore. They cater to mostly the middle class population in Indonesia.


Is it a good time to buy?

Net Property Income and Distribution Per Unit (DPU)

The net property income in 2014 decreased by 12.1% as compared to 2013. The DPU for 2014 decreased by 15.1% as compared to 2013. This makes the annualised distribution at 8.1% base on the price of 34 cents. In constant currency terms, net property income only decreased 1.2%. The currency depreciation of the Rupiah has affected the DPU by quite a significant amount. If Rupiah continues to weaken, then DPU may continue to get affected in the next few quarters.

Concern of loans maturity

Looking at its loans, most of it will expire by 2017. The closest one will expire in July 2014. This is $200 Million of the total $630 Million loan which is quite a significant amount. Once this loan expires, they will have to refinance it and probably will face higher interest rates in July. This is not a good sign for that $200 Million loan. If they can't refinance, they will have to find other ways to raise funds such as issuing rights which will dilute current shareholder's value.

Another scenario is they could pay back the loans in cash but it would reduce its assets by a large proportion. However, LMIR's current assets as at 31st December 2014 is only $171.6 Million. Cash and cash equivalents stand at $103.92 Million. It is not enough to repay the $200 Million loan so some form of refinancing or equity raising is expected when the time comes.

One thing to note is that on 18 December 2014, LMIR was granted $180 Million term loan facility with interest rates at 3% + SGD Swap Offer Rate (SOR). This loan is on variable interest rates and will be subjected to interest rates movement. As we know, interest rates have started to increase and this has affected LMIR's DPU and will continue to affect DPU when interest rates continue climbing.


Conclusion

Even though this stock is currently trading at a discount to its NAV of 42.4 cents, I expect NAV to decrease and DPU to decrease further also. This is in view of the currency risk and interest rate risk, This may cause a drop in the stock price if it happens.

If we want to invest in this company for income, we must ask ourselves is the Rupiah going to be stronger or weaker and will they have a lower or higher interest rate when they refinance their loans up to 2017? For now, I'll be staying on the sideline before I decide to invest in this company. Not vested at the moment.

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