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CGS-CIMB keeps 'reduce' rating on Lippo Malls Trust; OCBC ceases coverage

CGS-CIMB on Monday kept its "reduce" rating on Lippo Malls Indonesia Retail Trust (LMIRT), citing its higher costs and taxes as well as a weaker-than-projected rupiah against the Singapore dollar as reasons. It also kept its target price unchanged at S$0.33.

The research house said: "LMIRT’s current in-place two-year currency hedges are expected to roll off in Feb 19. The present weaker rupiah will likely have an adverse impact when LMIRT converts its rupiah distributions into SGD. Hence, we keep our 'reduce' call."

The trust last week announced a first-quarter distribution per unit (DPU) of 0.67 Singapore cents, a 24.7 per cent drop from a year ago. LMIRT saw a 1.1 per cent year-on-year increase in gross revenue to S$49.1 million on the back of additional income from three new assets purchased last year. But net property income (NPI) and distribution income slipped 4.6 per cent and 24.3 per cent respectively on higher costs as well as increased tax liability following the introduction of new tax regulations since January 2018. 

The manager of the trust, which owns malls in Indonesia, had already said in April that the latest withholding tax laws in Indonesia may have a "material impact" on the trust. The new rules mandate that all income earned from building leases in Indonesia will incur an income tax at 10 per cent of the total value of the amount collected by tenants, including service charges and utility coverage charges.

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At the time of introduction, some of the maintenance services for its properties were outsourced to a third-party service provider. This provider would collect service charges and utilities recovery charges from the tenants.

CGS-CIMB said: "With the new tax treatment on outsourcing service charges and utilities recovery charges, LMIRT will no longer outsource the operational management of the malls to a third-party vendor." CGS-CIMB said it has included the impact of higher service and utilities recovery charges into its projections from the second half of FY18 onwards."

On Monday also, OCBC Investment Research said it is ceasing coverage on LMIRT "due to a reallocation of internal resources". It noted that the trust's first-quarter’s distributions were hit by a 9.1 per cent weakening in the rupiah, the new tax regulation, as well as an increase in total property operating expenses.

"We believe that much of the impact from the operational issues that have presented themselves in the past year have already been reflected in the Q1 DPU performance. However, we continue to believe that the possibility of the rights issue will weigh on unit prices and see little upside catalyst in the near horizon. As of May 4’s close, LMIRT is trading at a FY17 historical yield of 10.8 per cent, and an annualised Q1 2018 yield of 8.4 per cent."

LMIRT units were trading flat at S$0.32 as at 10.36am on Monday.