New tax regulations in Indonesia

Lippo Malls Indonesia Retail Trust (LMIRT) announced that Indonesia has passed new tax regulations on income received/earned from land and building leases in the country.

In particular, such income will be subject to a 10 per cent tax on the value of the amount collected by tenants, including service and utility coverage charges. The new regulation is effective from Jan 2 this year.

For the purposes of illustration, assuming the new regulations were in effect as of Jan 1 last year instead, the Reit manager calculates that FY17 distribution per unit (DPU) would have been 7.2 per cent lower at 3.19 cents (pro forma) instead of 3.44 cents (actual).

A DPU of 3.19 cents works out to a historical dividend yield of 8.4 per cent against the April 11 closing price of 38 cents.

The news will prompt selling pressure on the counter.

The big three (Keppel Corporation, Sembcorp Industries, Sembcorp Marine) are expected to report better quarter-on-quarter earnings for Q1 2018, with likely limited major write-downs and provisions.

Keppel could emerge as the relatively stronger one with above-consensus reported profit with the best balance sheet and return on equity. Overall, offshore and marine earnings before interest and taxes margin are likely to hover around 1 per cent to 3 per cent on lacklustre yard utilisation.

Sembcorp Marine may still report a slight loss for Q1 2018, while Sembcorp Industries’ earnings outperformance hinges on land sales in urban development. India may report narrowing loss from higher merchant prices and interest cost savings.

The recent channel checks in some of the new Sheng Siong supermarkets suggest that the company has worked on improving its store display and brand image to appeal to the younger generation.

The new stores are much neater and cleaner compared with some of the Giant stores. Despite the other two incumbents – NTUC FairPrice and Dairy Farm – increasing their range of fresh produce, Sheng Siong still boasts the highest percentage of fresh mix in sales.

Sheng Siong still has a fairly captive population. We previously highlighted that the large number of supermarket sites available for lease by the HDB was a key concern.

We maintain the view that close proximity between some of these sites would eventually lead to cannibalisation of sales. But we think the impact would likely be felt in two to three years when most of these sites have been bid for and opened.

The construction of the new extension was initially estimated to add 10 per cent in capacity but based on recent conversation with management, it revealed that the extension would add 20 per cent more storage space. The extension should be completed by early next year and should allow the group to reap more operational efficiencies.

Upgrade to “buy” with a higher target price of $1.11 as a result of a 2 per cent to 3 per cent increase in our FY18-20 estimates and an increase in target price to earnings from 19 times to 21 times.

New launches this year have achieved significant premiums over comparable projects launched in recent years. The price rebound appears to be broad-based with strong performance across all market segments.

There are 15 residential sites up for tender, which could add 4,900 units to the pipeline for developers. These deals represent significant revenue opportunities that developers can pursue to capitalise on the market rebound.

Most developers in Singapore have a net gearing of less than 1.0 time, which implies significant balance-sheet capacity to pursue growth opportunities.

With significant exposure to Singapore’s residential market, Bukit Sembawang Estates and City Developments are the biggest beneficiaries of this trend.

A word of caution has to be said about a supply build-up in 2021 estimates. With collective sale deals since last year potentially adding 20,000 units in their new properties, we see private housing supply rising to over 17,000 units in 2021.

As such, the market could focus on potential weakness from late-2020.

(Source: Straits Times)