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Having Fallen 30% In Price In 5 Years, Can Lippo Malls Indonesia Retail Trust Turn Itself Around?

With China’s stock market turmoil and Greece’s debt issues, it’s easy to miss out the woes that are befalling Singapore’s southern neighbour, Indonesia.

The rupiah, Indonesia’s currency, has crashed by around 50% against the Singapore dollar since the start of 2010. In fact, the rupiah has tumbled in recent times to levels that were last seen during the Asian Financial Crisis of the late 1990s, some 17 years ago.

Indonesia’s currency issues have heaped pressure on Indonesia-based but Singapore-listed companies and investment trusts.

One good example is Indonesian retail malls owner Lippo Malls Indonesia Retail Trust (SGX: D5IU); the real estate investment trust has seen its units fall by 30% in price since the start of 2010 even as the broader market, represented by the SPDR STI ETF  (SGX: ES3), a tracker for the Straits Times Index  (SGX: ^STI), has climbed by 12%.

Can things ever turn around for the REIT? Here are three reasons why it may.

Hedging in place

Lippo Malls Indonesia Retail Trust is well aware of the risk which can come with a falling rupiah and as a result, the REIT mentioned in its 2014 annual report that it “has entered into foreign exchange hedges to hedge its estimated quarterly cash flows in Indonesian Rupiah until the end of 2016.”

These hedges can help to cushion any negative impacts from adverse currency swings which may affect the REIT’s bottom-line and distributions.

Growth by acquisitions

My colleague Stanley Lim had noted only two weeks ago that Lippo Malls Indonesia Retail Trust has made two new acquisitions of the Indonesian malls Lippo Plaza Batu and Palembang Icon and the purchases are accretive to the REIT’s distributions on a per unit basis.

The REIT may also have a healthy pipeline of assets to acquire given the reach of its sponsor, PT Lippo Karawaci Tbk, Indonesia’s largest listed company by total assets.

Undemanding valuation and juicy yield

At its current unit price of S$0.35, Lippo Malls Indonesia Retail Trust has a very high trailing-12-months dividend yield of 8.2%.

In the first quarter of 2015, the REIT’s distributions per unit (DPU) for the quarter had jumped by 16% year over year from 0.68 Singapore cents to 0.79 cents. Based on the REIT’s reading of its own micro-economics, it’d appear that brighter days are ahead. Here’re the REIT’s comments from its first quarter earnings release:

“As the shopping centre moratorium continues, the near term retail space supply in Jakarta will be limited. This will create a favourable market condition for existing shopping mall owners as retail space in Jakarta will be keenly sought after in the next few years.

The outlook for quality retail spaces looks promising in the next 12 months as both local and foreign retail players continue to remain active. Higher disposable income, lower inflation, coupled with an emerging trend of lifestyle shopping malls are expected to drive the demand for retail space.”

While currency woes may still plague the REIT, it’s worth noting, as I mentioned earlier, that currency hedges have already been put in place till the end of 2016.

In the meantime, Lippo Malls Indonesia Retail Trust is also selling for just 0.8 times its latest book value. These low valuations could potentially give some downside protection for investors.

Foolish Bottomline

While there may be things to like about Lippo Malls Indonesia Retail Trust, it’s important to note that its history with its DPU has been less than impressive.

The REIT’s first annual distribution was in 2008 and it had doled out a DPU of 4.96 Singapore cents. But in 2014, its annual DPU was just 2.76 cents, a fall of some 44%.

This undesirable track record is a source of risk, in the sense that while a weak rupiah may have played a part in the REIT’s shrinking distributions (this is something not within the REIT’s control), it could also be a sign that the REIT may not be the best operators of retail malls around.

Investors would have to weigh the risks and rewards with Lippo Malls Indonesia Retail Trust before any investing decision can be reached.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.