Wednesday, September 11, 2013

Lippomall - Overshooting to the downside

We all know market tends to overshoots, exuberance will cost a company shares price to jump above whatever value any good development might have on the company, and being overly pessimistic above the future will also cause the price to drop beyond any fair justifications.

The fact that Reits has corrected due to impending interest rate hike in the future is justified, in fact, I felt most reits are overvalued during May when most just yield between 5-6%. Thus, it is important to do quantitative analysis to guage the impact on bad news and judge for yourself to see if its overdone.  

Then tapering announcement happens, and many reits experienced a free-fall, I initial a position at 7.5% yield.


This is what I posted at (13th June) then:  

"Was looking closely at lippomall again when yield reach 7.5%. It seems like a reasonable yield and taking into consideration the following.

Pluit village mall settled the messy ligitation with carrefour, I am not sure how the out of court settlement terms are, but the trust is insured against such losses if I read correctly. Carrefour has a floor area of about 13000m2 before the issue starts, and carrefour keep to the same area, the occupancy rate at pluit village will improve to above 90% and contribute 3.8 million NPI in a year, which works out to be 0.001772195 cents. Not significant but the amount is like a buffer to protect against rise in fiance cost as a result of interest hike, which everyone is talking about.

Up till 2014, the only floating rate that LMIR is exposed to is for amount of 75 million at a rate of 4.3% They still have 425 million fund not drawn from their MTN. Assume they use it to retire the 147.5million bank loan, and the interest that have to pay become 6.3% (the highest trance of MTN notes is 5.875% due 2017) , the correspond increase in finance cost is only 3 million. 

seem like the 7.5% yield is "quite safe" till 2015 at least."


Then another experienced and seasoned forumer pointed out to me that I didn't account for currency risk. Well, I did get punished for not doing a detailed research and when capital outflow begin in Indonesia, the currency start to fall, and all Indonesia property counters listed in SIngapore get a heavy selldown.

This time round, I look deeper and currency risk, and realized currency affect finance costs too, since loans are in SGD dollars but revenue is collected rupiah. But I realised a 15% fall in currency will only lead to a 5% dent in distribution,  so forward annual DPU should be around 3.5 cents. So when with this reduced DPU, and I still managed to get a 8.6% yield, I decided to average down. Luckily, price has rebounded, and I now have a small margin of safety

With more investment in this counter, I continue to dig deeper, to see if there is any impact on revenue, and as mentioned in my previous post, there do not seem to be any impact on revenue or NPI during volatile period of 2008 and 2009. In fact, due to the hedging of exchange forward contract, the greater the fall in rupiah, the bigger the unrealized profits in forward exchange contract, and all these are non-cash items that will not affect distribution.

This time round, I play safe and consult the Gurus at valuebuddies again, and ask why is there such an issue with currency depreiciation. Another kind soul point out the pitfalls to me, here is what AlphaQuant says:

"1) interest payment: repayment in SGD will translate into a higher equivalent in IDR
2) debt rollover: given the assets are in indonesia, how likely are they able to secure debt rollover from Singapore based funding sources on favorable terms (at worst, using their malls as collateral) - failure to get good rates means
a) equity raising via rights/placements
b) idr funding sources - note 10y IDR bonds are now at 8.5% vs SGD @ 2.7. This translates into a higher funding costs if SGD funds cannot be secured.
Will the IDR depreciation lead to loss of confidence in Sg banks to lend to them?"

3) Is the foreign capital outflow + raising of FASBI rates going to choke off domestic growth hence domestic consumption demand? Inflation in indonesia is now at 8.8% - is the economy heading into a situation of stagflation? Malls afterall, are only as good as the ability of the locals to spend, and if consumer confidence gets hit, tenant vacancies will rise. Think of the ghost malls during AFC.


Point 1 accounted for as mentioned in the lower DPU.

2a is not a issue, we should always set aside money to participate in rights issue when we invest in reits.

2b is a value issue, I have accounted for a 2% increase in interest rate in 2014, I think that is highly aggressive already, next is the question, will SIngapore banks not lend, since Indonesia properties are of lower value due to currency fall. I believe there is a price for everything and every risk, 68% of LMIRT’s S$1.772 billion asset portfolio remains unencumbered, so that means 1.2 billion can be pledge to secure loans, even at firesale price of 50%, that will be 600 million, how not to get a loan of 147.5 million in 2014 with 600 million?

3) is a valid concern, if 3 is to happen, all bets are off, since with higher vancancy, NPI will fall and valuation of properties will fall too. SO point 3 is indeed a risk you must bear when you buy lippo-malls.

With a average yield of 8% until 2015 at least, do I feel compensated enough? Well, I do, how about you?

I would like to acknowledge the many online forummers or bloggers who have selflessly share their ideas and comment on others, so that we can all get a better picture. NOthing is free, but good advice and comments online come free many a time =P

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