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LMIR Trust Benefits From Indonesia’s Rising Prominence
Corporate Digest | 16 October 2009
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By: Xavier Lim
Articles (51) Profile

Morgan Stanley has recently suggested that Indonesia should be considered a BRIC (Brazil, Russia, India, China) country, while Goldman Sachs has also identified Indonesia as one of the ‘Next 11’ big emerging markets. Indeed, all eyes are back on Indonesia since the 1997 Asian crisis. More and more investors now believe that Indonesia is another promising market for the future that offers interesting opportunities.

Indonesia, the world’s fourth most-populous country with around 230m people, has a young population with the working-age cohort (those aged 15-64) not due to peak until 2025, and remaining high at 64% in 2050. Its large domestic market (consumer spending accounted for an average of 64% of Indonesia’s GDP between 1998 and 2008, up from 58% between 1988 and 1997) and its relatively low dependence on external trade provided some insulation from the global economic turmoil. Its GDP per capita of US$3,980, is approximately 40% higher than India, which excites investors.

Raising its economic growth forecasts for Indonesia in 2009 to 4.3% from an earlier estimation of 3.6% in March, the Asian Development Bank said that “robust growth in private consumption, underpinned by easing inflation and a surge in election-related government spending, drove better-than-expected economic growth in the first half of 2009.”

In order to capture this huge domestic spending power, local and foreign retailers are developing modern retail structures at a rapid pace. Carrefour and Dairy Farm are actively engaged, and there is also speculation of other foreign retailers’ interest in Indonesia.

Banking On Retail
Lippo-Mapletree Indonesia Retail Trust (LMIR Trust) is established with the principal investment objective of owning and investing, on a long-term basis, in a diversified portfolio of income-producing real estates in Indonesia that are primarily used for retail and retail-related purposes.

LMIR Trust’s asset portfolio comprises 8 retail mall properties and 7 retail spaces and is centered on the island of Java, the most populated island in Indonesia. LMIR Trust’s malls have a large combined tenant base that includes leading domestic names such as Matari, Centro and Rimo Department Stores and Giant Hypermarket. International tenants include Starbucks, Carrefour, Bata and SOGO, amongst others.

Shane Hagan, Chief Financial Officer of LIMR Trust told Shares Investment (Singapore) during an exclusive interview that although there is new supply of retail malls coming into the market, he believes that these new retail malls cater more to the Jakarta-based high-end segment. “This has not eaten into our market,” Hagan remarked. He further added that he does not see a lot of competition in the mid-range malls. “While there is an abundant supply of malls coming on, we don’t think that it is greatly affecting our portfolio,” Hagan said.

Moreover, LMIR Trust’s malls are strategically located in high catchment middle to upper-middle income residential areas. It is estimated that the middle class population totals around 35m people and is expanding rapidly, especially in the urbanised areas where a middle to upper middle class is emerging. LMIR Trust’s Sponsor, Lippo Karawaci, which owns and manages 24 malls, including its 8 malls, effectively provides LMIR Trust with a potential acquisition pipeline of high quality strategically located retail malls. As at 30 Jun-09, LMIR Trust has a strong occupancy of 95% versus an industry average of 84%.

Hagan revealed that one of the strategies LMIR Trust has adopted is to ride on market trend to enhance retail space, rather than adopting a comprehensive assets enhancement strategy. “Opportunity concept! Because things change all the time, a comprehensive configuration of the mall maybe workable for today, but it might or might not work next year,” Hagan explained. This is especially true in today’s fast changing environment. In order to stay competitive, businesses must be able to stay ahead of competitors through market trend spotting, innovation and cost saving.

By using the ‘opportunity concept’ strategy to enhance the retail space, LMIR Trust was able to achieve high estimated return on investment (ROI) of above 30% by successfully converting an ice skating rink into new cafe and restaurants and an expanded food court at Istana Plaza. Another successful conversion of a supermarket into specialty shops at Bandung Indah Plaza has allowed LMIR Trust to achieved another high estimated ROI of above 40%.

Financially Healthy
LMIR Trust reported a total loss of $33.5m in 1H09 attributed to large amount of unrealised loss on foreign exchange forward contracts. This was due to mark-to-market adjustment of the currency swap. However, its cashflow generated from operating activities was $33.9m in 1H09 as compared to $26.9m in 1H08. “Every quarter, we have to value the cross currency swap at market value and take the difference to account. Last year, due to the global economics crisis, the Rupiah depreciated and the value of cross currency swaps went up. This year, as Indonesia’s economic performance is better, the value of the swap went down. Therefore, we have to write off this value,” Hagan explained.

But Hagan was fast to point out that it is a non-cash item and has no impact on LMIR Trust’s distribution and bottomline. He further remarked that by using the cross currency swap, LMIR Trust is able to reduce the volatility of the Rupiah.

LMIR Trust’s casual leasing, which made up 20% of its total income before the financial crisis, has since fallen to about 10% because of the cutting back of additional space leasing from the tenants. However, Hagan argued that although their bottomline was affected by the decrease in casual leasing, their asset valuation is stable.

He highlighted that LMIR Trust has a very low gearing of only 12% and cash and cash equivalents of $106m as at 30 Jun-09, which is why LMIR Trust does not have to raise additional capital, unlike other Singapore REITs.

Based on its net asset value per share of $0.739 and an enticing 12% dividend yield, coupled with the ability to leverage on its Sponsor’s assets, experiences and networks for growth in Indonesia, LMIR Trust appears to be trading at attractive valuations.

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

Please click here for more information about this author.

Lippo Malls Indonesia Retail Trust  0.230 -- --   
Business: REIT that is engaged in invs in retail ppties in Indonesia.

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