Since July 2017, the shares of Lippo Malls Tr (D5IU.SI) has fallen 29%, while LMRT 7% Perpetual bond has dropped 6.2%.
Key issues that has plagued Lippo Malls Tr :
- Downgrade by Moody’s
- New withholding tax laws
- Weakening Rupiah against SGD
- Increased property operating expenses and high financing expenses
I believe these have already been factored in the price. In fact, the price probably dropped more than it should. However, there is one more issue that is bothering me – how are they going to raise money?
How will they continue to raise money?
Investors at the recently AGM seems unhappy that Lippo Malls Tr issued perpetual bonds at 7% and 6.6% (I own the 6.6% !).
Their CEO told their investors Lippo Malls Tr wants to continue to grow. 7% is cheap compared to the 12% if they were to raise money in Indonesia. But said they are not likely to issue more perps for the time being.
S$280M of their debts is due to be financed in 2018. Their average cost of debt excluding the perpetuals is 4.59%. This cost of debt can only increase because of SGD recent increase of interest rates.
With their gearing standing at 35%, and MAS ceiling at 45%, they are also not likely to issue more straight bonds. Which leaves equity fund raising. There has been rumours of a possible upcoming rights issues. I think this is probable. Share prices usually drops on announcement of rights issue. Have this been factored into the price? I do not think so.
How will the Lippo group look upon a rights issue? They have about 30% ownership of Lippo Malls Tr. Do Lippo group want to pour more money into Lippo Malls Tr?
Lippo Malls Tr trades at the annualized yield of 8.4%. For me, 0.30 is a nice price to start to accumulate some.
LMRT 7% perpetual bond
On the other hand, LMRT 7% perpetual bond looks very attractive to me now. A bond yielding 7% YTC and its shares yielding 8%.
Why do I like LMRT 7% perpetual bond
- Upside for Lippo Malls Tr is still questionable with possible upcoming rights issue.
- Bonds are much more resilient than shares. Although there is little upside for bond, there is also little downside to bonds. Its volatility is much lower than shares.
- Although its a perpetual, the next call date of LMRT 7% perp is Sept 2021 (only 3 years away) and the reset is 5Y SOR rate + 5.245%. The 5y SOR rate is currently 2.408%. If this bond were to reset today, the new coupon would be 7.653%. Most investors believe that the 5Y SOR can only increase going forward.
- The current spread of LMRT 7% Perpetual is 4.9538%. This is still tighter than the initial spread when it was launched Sep 2016, which was 5.245%. This current tighter spread relative to its initial margin, makes it more likely that LMRT will redeem this perp in Sept 2021.
- Recent negative news did not affect Maybank Kim Eng in still allowing LMRT 7% Perpetual to be margined as Grade A security. At the current price of 99.75, and funding $85,000 and financing $165,000 at 2.28%, the net supercharged return is 16%.
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