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Monday, December 8, 2014

LMIR Trust - Placement issue @ $0.34/share

I can understand why existing shareholders of LMIR Trust are frustrated and this has sent the share price down by 6% today.
 
Sometime in the mid of Sep earlier this year, the management had announced their intention to acquire Lippo Kemang Mall into their portfolio at a cost of $385 million. You can refer to the circular if you wish to read on further on the acquisition.
 
Back then, the Pro Forma for the acquisition looks like this (see below table). The management has intended to fund this acquisition via a mix of internal cash, debt and equity. For the equity portion, the pro forma below used is based on raising $45 million at $0.405/share with an additional 111,111,111 units.

Pro Forma details from Circular

A couple of months passed and shares of LMIR has dropped since then. At a price of $0.37 before yesterday announcement was made, it simply does not make sense to issue the placement at $0.405 anymore since market price is lower. So they came out with a revised by deciding to raise $40 million at issuance $0.34/share with an additional 111,647,000. As a result of this move, this has sent the share price dropping by 6% today. Current price is at $0.34.
 
I've done a quick revised Pro-Forma over my lunch break and changed the additional units as a result of the revised placement. The impact is minimal. DPU has gone down by 1 cents over 6 month period while annualized yield has gone down by 10 basis point. Everything else is assumed to be constant.
 
In fact, at a current price of $0.34, this means that the annualized yield is at an enticing 8.5% (2.9/34). Pretty decent in my opinion.

 
 
Conclusion
 
Existing shareholders must be pissed at the lag of such fund raising timing which cause them to be unfavorable as compared to the original pro-forma. New shareholders who can get in at $0.34/share in the open market are looking at an enticing yield of 8.5% annualized, but do take note that there is a $5m difference ($45m - $40m) from the original pro-forma which the management had to fund now via cash or debt. In other words, if you are a new shareholder, you are getting a better yield but slightly higher gearing on the company.

28 comments:

  1. Very Interesting valuation B.

    Are you going to pick up some shares of LMIR trust yourself?

    ReplyDelete
    Replies
    1. Hi Jeff

      I'm still pondering.

      The yield is enticing enough to get in. But that's just from the yield point of view. Everything else remains a risk.

      Delete
  2. B,

    My calculation of yield is a more conservative 7.9% on the price 34 cents.

    I used 4 quarters of .55 cents ( to account for dilution and Pulit village higher non-occupancy), and a lower than forecast NPI contribution of 15 mio Instead of 19 mio. Given Kemang village is up and running only for 2 years, and is already 92% occupied, I do not think this figure will swing too much, given the apartments are progressively TOP from2013 to 2013. I believed tenants with want to see how the residents can make a impact to their sales when the place is fully sold then a exodus that will make occupancy jump. So I believe 15 mio is realistic and conservative.

    Barring another currency weakness bout or wrong Hedging, annual dividend after 1 off costs, (1-2 quarters later) should be 2.75 cents...

    I am queuing at 34 cents since morning, no luck.

    Might be catching falling knife here

    ReplyDelete
    Replies
    1. Hi Sillyinvestor

      Your calculation is more conservative in that you are using the latest 0.55 cents as a guide to the latest operational review of the malls. I am using the pro-forma figure for the 6 months (2 first half quarters result), so they are likely to lag quite a bit.

      34 cents seem decent though, I might just nibble a bit.

      Delete
  3. As a very recent ex-shareholder of LMIRT, my sincere advise to fellow friends is to run and don't look back. Do not look at this recent exercise in isolation. Look at their track record and you can see a significant drop in share price after every acquisition. LMIRT managers DESTROY shareholder's value. Don't fool yourselves, don't give urselves. RUN and don't look back,

    ReplyDelete
    Replies
    1. Hi Anonymous

      You must have been a very pissed ex-shareholder of LMIRT :)

      I feel they have a different agenda every time they are doing an acquisition. Their sponsor is strong, so there will be more of this to come. At some point, this could become an attractive counter to enter. We just need to wait for it to become more value :)

      Delete
  4. Hi B and Silly!

    Yeah, I saw the drop too and was figuring out what happened. Retail sector in a growth country, trading under P/B... Looks very tantalizing to me sans the currency risks. Unavoidable for assets in foreign countries though. I'm a sucker for value traps/plays though. I'll probably be parachuting down, chasing after this knife!

    ReplyDelete
    Replies
    1. Hi GMGH

      To be honest, the P/BV looks no more importance for this counter to me anymore. As someone has mentioned above, they look to me as if they had different agenda for acquisition every time and exisiting shareholders value are destroyed every time they try to do that.

      You can grab this for the yield, but everything else remain a huge huge risk to me

      Delete
  5. Oh B,

    Reading your post again,

    I wonder if u have mixed up the consideration shares and the equity raising.

    The consideration shares is to raise 45 mio, so with a 34 cents price, there is more dilution.

    Equity raising ex planed to raise 110 mio initially. But they are going for 40 mio. The shortfall is actually 70 mio.

    It could be covered by cash, and stretching the term loan, initially to be 140 mio to the max of 180 mio.

    Too bad no specifics on how the 70 mio difference is to be "accounted for"

    ReplyDelete
    Replies
    1. Hi Sillyinvestor

      They mentioned the initial 110 m for equity raising, but I am using the original pro-forma figure in the circular where they show how they are using $0.405 to raise $45 million for their initial equity raising.

      They are revising now to $0.34 and reduce them to $40 million, so shareholders value are definitely destroyed there by these move due to current market conditions. They know that at this price they cannot raise $110 million at a price of $0.34, the acquisition would be dilutive and not accretive for shareholders in that case.

      This is a case of stretching the cash, stretching the 35% gearing and raising funds somewhat too late as share price has plummeted since. With management fee somewhat not aligned to shareholders value, they can just keep increasing their asset base to get higher management fee.

      Delete
  6. Hi B,

    Glad to see active discussion here in your blog. When i was reading their press release, i was wondering who did LMIRT placed their shares to? It was at a 7 per cent discount to VWAP, which is quite significant in my view.

    Need to dig deeper into the fundamentals but I'm busy digging in other trenches for gold at the moment. :p

    ReplyDelete
    Replies
    1. Hi SRSI

      Welcome to the discussion.

      You are an Sreit expertise so we need your input hahaha.

      Actually its quite common to place the placement at around 7% discount to market price to make them attractive. Otherwise the takers wont be bothered to take it up at all.

      Delete
  7. No luck so far for my 0.34 queue. Not sure if its a good/bad thing though ...

    ReplyDelete
    Replies
    1. Hi PIB

      $0.34 is too long. If you want this for the long term, I would just go for the $0.345 ;)

      Delete
  8. Ha! Ha!
    If LMIRT has a Right Issues now, how nice? Can try to get some nil-paid-rights if the market is not in favor of the issues.?
    My 2 cents only.

    ReplyDelete
    Replies
    1. Hi temperament

      The placement doesnt seem attractive.

      You can easily get at $0.345 now and get that advance $0.0055 distribution. $0.34 is definitely better than those placement.

      Delete

  9. Hi B,

    Before reading your post today, I added 20 lots of LMIRT early this week at 0.345, which I already owned 20 lots prior. Yield is attractive. Not so worry about the gearing, which is still below 40%. Strong sponsor provides added confidence.

    Indonesia is going through a transition of politics, rupiah is still weak and I think this is the main reason why LMIRT is share is sliding. However real income of Indonesians is actually improving. Considering rents in Jakarta is the lowest in the region and Indonesia government is not going to have more malls due to traffic problems, LMIRT occupancy rates should continue to be strong with potential rent increase. Indonesia growing middle class and continue economy growth >5% is also encouraging over long term. Need time though.

    At current price which results in discounted PB, high yield, I am hoping that price will eventually be pushed up again. If not, I just have to enjoy my yield for a longer time.

    Rolf

    ReplyDelete
    Replies
    1. Hi Rolf

      My view is a little different from yours.

      Like some of the other comments have mentioned, I think there is a tendency for the weak management of the sponsor in terms of increasing shareholders value. Over the years, they clearly lack the momentum to increase shareholders value despite making a few acquisition since. The assets are middle class level so we are talking about potential diversion of the occupancy to other competitors.

      They have been blowing their trumphets over the growing Indonesia story but it has not worked for them. For me, I am only attracted by their dividend yield, nothing much than that. I see that now you've got quite a bit on the shares. I dont think it will go down as much but I don't think we are going to expect anything special from this counter other than hoping for the yield to be maintained.

      Delete
    2. Hi B,

      I am sure you are more familiar with the management! Haha. Your differing views help me think better! I appreciate it. Indonesia growth story need more time and the yield is good enough for me to wait.
      Indeed 40 lots is enough for me now, otherwise more I will get constipation.

      Rolf

      Delete
  10. Hi B,
    To me, this is a strange case of Dr Jekyll and Mr Hyde when I compare this Reit with First Reit, especially since both get most/all their earnings in Indonesian Rupiah. Apart from this, how about Global Logistics Properties, Saizen, and Croesus Retail Trust who get most/all their earnings from Japanese Yen which has weaken a lot too. Hence its either one is undervalued or the other is overvalued?

    I think the problem is with the recent 2 private placements. If its a rights issue at a right prices like OCBC and Ascott Reit, the existing shareholders will have benefit.

    MS

    ReplyDelete
    Replies
    1. Hi MS

      The structure is a little different with First Reit. For first reit both income and loans are denominated in the same currency but for lmirt loans are denominated in sgd while income npi is in rupiah. The reasoning is that they want to get their loans cheaper in sgd terms but as we can see the fluctuations in exchange rate has not helped them.

      Delete
    2. Hi B,

      I don't think the currency movement will have much impact since they will also have done some hedging to net off, plus rental growth. Beside, in their recent released results, they have gained from forex. IDR has also started to climb against SGD, and reducing the oil subsidies also helped to strengthen the currency.

      The problem is actually with the recent 2 private placements. I believe that the staff there esp the CEO are better off not doing anything. If the CEO is working in some other listed companies, he will have been gone.

      MS

      Delete
    3. Hi MS

      Actually, the currency movement has impact there. You can see that clearly when the NPI is converted from Rupiah terms to SGD terms. Hedging was an option, but it has a major cost to it, which impacted the net benefit of doing it. I don't want to disclose the exact details because I used to work there and know all the details inside but the CEO is a very good one and has made some good decisions along the way. Sometimes it requires more than just the CEO alone to do it, there is the board members and sponsor on the other side of the equation.

      Delete
    4. Hi B,

      Your last sentence is the very reason why I believe that MAS n SGX should actually step in to regulate even more to create a fairer levelling field between the sponsor, reit manager and shareholders.

      You cant control currency movements but you can control how the company is being run. To be frank, if the company didn't do any hedging at all, I would think that they are not running the company properly. Even if there is a cost but they still have to do it or else their financial management would be very poor.

      If you are picking a growth stock, would you chose a stock that is limited to only Singapore operations earning Singapore Dollars, a population of 5.5 mio ppl, constrained by land size, and paying out 60-80% of their profits and giving you 4-6% yield a year? Or would you prefer a stock that take risks and go overseas, have a much bigger population, bigger land size, paying you 1-3% yield only and keeping much needed cash for overseas expansion?

      MS

      Delete
    5. Why population is a big factor and consideration?

      Assume 5.5mio ppl spending 100 dollar each, the spending is 550mio.
      If 5% of the population are HNWIs, means around 275000 people.

      If the population is 250mio ppl but only spend 10 dollar each, the spending is 2.5b. If 5% of the population are HNWIs, means around 12.5mio ppl.

      Why land size is a factor? I use malls and cars as example. How many malls/carparks/roads can you still build?

      MS

      Delete
  11. Actually I'm tempted to write to MAS about REITs private placements, scrips, issuing new units to the REIT manager, and should the manager be only paid based on EPS and DPU rather than AUM.

    MS

    ReplyDelete
    Replies
    1. Hi MS

      There has been quite.a.bit of debate on the way the management fee is structured and certainly linking them directly to.npi or dpu is not the answer. For instance if we are linking mgt fee to dpu management can take a short term view by leveraging as much as possible to increase dpu but leaving future gearing for future management to clean.

      Delete
  12. Hi B,
    Whether the gearing ratio is low or high, it doesn't really matter much to shareholders, I used LMIR as example. In Sep14, its only 28.3%.

    I believe that this can be mitigated if MAS n SGX limit the gearing ratio to 30-35%, and there is a bonus clawback set in place for senior management. Apart from that, I believe for REITs well being, MAS n SGX should set the 90% income payout to unitholders to 70-75% only. Only then the sponsor and REIT manager wont use "not having enough monies" as a reason for doing rights issues and private placements.

    MS

    ReplyDelete

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