Are LippoMalls bonds a good deal?

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21 Dec, Business Times released the following news story:

http://www.businesstimes.com.sg/companies-markets/moodys-reviewing-lippo-malls-retail-trust-rating-for-possible-downgrade-to-junk

22 Dec, Straits Times released the following:

http://www.straitstimes.com/business/companies-markets/moodys-reviewing-lippo-retail-trusts-rating-for-possible-downgrade

22 Dec evening, LippoMalls rebutted the implications of Business Times story:

http://infopub.sgx.com/FileOpen/20171222_PR-LMIR%20Trust.ashx?App=Announcement&FileID=483091

LippoMalls price reactions:

  • LippoMall shares dropped 6% and has since recovered
  • LippoMalls  straight bonds dropped 1%
  • LippoMalls 7% perp is down 3.5%. Current price is 101.75 / 103.0. YTC is 6.1%. Supercharged yield is 13.3%.
  • LippoMalls 6.6% perp is down 3.9%. Current price is 100.0 / 101.0. YTC is 6.24%. Cannot be supercharged.

Chart of LippoMalls 7% perps

Read the latest Nov 2017 results here  :   http://lmir.listedcompany.com/newsroom/20171102_190958_NULL_E7PX738B3NX1WX7G.3.PDF

 

Possible concerns for me:

  1. Possible downgrade from Baa3 to Ba1 in the next 90 days by Moody’s. Note that this is only 1 rung in the Moody’s credit rating tiers. Prices may drop again if downgrade indeed goes through – depends on market sentiment.
  2. LippoMalls derives 1/3 of their revenue from Lippo Karawaci group. The scenario that Lippo Karawaci runs into short term liquidity issues, defaulting its rental payment to LippoMalls is possible. but is not likely at this point as the Lippo debts are not high, and that Lippo Karawaci is Indonesia’s largest listed company by assets. They can pick and choose what to sell to meet their obligations. Lippo Karawaci latest financial report is available here: https://www.lippokarawaci.co.id/uploads/file/LPKR%20Presentation%20-%20Q2’17%20(UPDATED%20-%20JUN’17)(1).pdf
  3. S$190M debts are due for refinancing in 2018. This is 32% of their total debts. They will likely be paying a higher cost of debt. Future earnings may drop.
  4. Forex risk of SGD strengthening against IDR may hurt the share price.

Whats good about LippoMalls :

  1. Share and bond prices are down. The sell-off may be an over-done.
  2. Bond and share dividend and coupon yield are high
  3. Debt to Asset at 32% is relatively low
  4. Rising DPU
  5. Diversified tenant mix
  6. Relatively long tenant weighted lease expiry profile

Summary:

The rebuttal by LippoMalls CEO answered most of the doubts that I have, the above 4 concerns are the risks I have to bear was an investor. I think that the risks are relatively low compared to the returns.

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