During recent earnings calls memory chip makers have postulated that the market will return to higher margins once price elasticity causes demand to increase. This popular myth needs to be treated with great skepticism since, as this Insight will reveal, short-term price elasticity has a negligible impact upon memory chip sales if it has any impact at all.
Airport connectivity in Indonesia has reached a milestone last year when they announced the airport express but has there been any improvements in the service and load factor? The management company, Railink, definitely tries its best to upkeep their service level and increase awareness. Indonesian usage of internet through smartphones also tells about how important smartphones as a center of their daily life.
Blue Bird (BIRD IJ) has gone creative when it comes to increase their online and offline presence; not only having an app that is comparable to Grab and Uber but also creating a dedicated taxi waiting area in a mall. Is Go-jek only a ride hailing app? My experience on Go-send tells otherwise.
How about the upcoming Presidential election? What will happen in a rematch between Jokowi vs Prabowo? Does Prabowo really have no economic policy? His answer when asked on what sort of supportive policies to help Unicorns grow shed some light on his understandings and knowledge on economic policy.
Volatility set to rise as Thailand, Indonesia and India all Face ElectionsRussia: Michael Calvey, a US citizen and one of Russia’s most prominent foreign investors, has been detained.
Indonesia: Incumbent President and his challenger from the military are trying to outdo each other in spending largesse targeting rural poor ahead of the May election.
South Africa: Recent inflation readings have been the lowest in a long time on lower fuel expenses. Expected to stay low.
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On Friday, March 15th, an estimated 1.6 million students in over 120 countries (source: Time magazine) walked out of classrooms and took to streets demanding radical climate action. Climate change activism rarely grabbed headlines or wider public attention as it is doing now. Rising climate activism will continue to train the spotlight on industries/businesses associated with carbon-emission making it increasingly difficult for them to expand capacities or secure funding. Large institutional investors – sovereign funds, pension funds, insurance companies – have begun toincorporate climate risk into investment policy and are limiting exposure to sectors that directly contribute to carbon emissions – primarily coal, crude oil producers and power plants based on them. Expect sector devaluation; active investors may well look beyond juicy near term earnings and dividend yield.
Even as scientists and meteorological organisations keep warning of dire consequences unless concrete action is taken to limit carbon emissions to stall climate change, political establishment/regulators in most countries are in denial while others are doing little more than lip service. If so, should corporates care? even though businesses are the ones that play a direct role in escalating carbon emissions. With rising consumer awareness and activism, several industries associated with carbon emissions are already facing operational and funding challenges; we believe, it pays for all businesses to be above par on ‘climate action’ – it would be in their own self-interest, not just general good. And do Investors bother?Under the aegis of Climate Action 100+, an investor initiative with 320 signatories having more than USD33 trillion in assets collectively under management, they have been engaging companies on improving governance, curbing emissions and strengthening climate-related financial disclosures. It has listed out Oil & Gas, Mining, Utilities and Auto manufacturers as target sectors. Investors have already been making an impact – by vote or exit. It sure makes logical sense to effect positive change and minimise climate risk when you have a long term investment horizon.
In the detailed note below we
discuss how rising consumer/investor activism and/or political/regulatory changes are posing challenges to key sectors –Coal, Oil & Gas, Automobiles/Aviation, Consumer goods – that are associated with carbon emissions.
analyse how rising climate activism is negatively impacting growth prospects and valuation of companies in these sectors.
highlight the opportunities for businesses to capitalise on changing consumer preferences for products that minimise carbon footprint and differentiate themselves by being on the right side of climate action.
present a quick primer on climate change and lay down the key facts and data on climate change as presented by World Meteorological Organisation, NASA and IPCC.
However, the report does NOT discuss potential risks to businesses from the aftermath of Climate change. Unlike our recently released report Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Bewarethat looked into sector’s environmental violations and attempted to estimate potential earnings/growth/valuation downside as leading textile players adopt sustainable practices, we believe the impact of unpredictable climate change poses a threat that is not easy to identify or quantify.
Energy Transfer LP (ET US) and Royal Dutch Shell (RDSA LN) have signed a Project Framework Agreement to further develop a large-scale LNG export facility in Lake Charles, Louisiana and move toward a potential final investment decision (FID). They have started actively engaging with LNG Engineering, Procurement and Contracting (EPC) companies with a plan to issue an Invitation to Tender (ITT) in the weeks ahead. We look at the potential contract size and winners and also the other US LNG projects that could be negatively impacted. More detail on the LNG project queue for this year in: A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies.
Leong Hup International (LEHUP MK) (LHI) plans to raise up to US$400m in its Malaysian IPO. LHI is one of the largest integrated poultry producer in Southeast Asia.
LHI was listed on Bursa Malaysia from 1990 to 2012. Since delisting, it has consolidated its Southeast Asia operations under a single entity and is now looking to relist the larger entity.
While revenue has been growing steadily, margins have been volatile. In addition, its difficult to pinpoint which products are performing well in which geographies. The feedmills business seems to be a more consistent performer as compared to the livestock business. It’s also a larger revenue contributor in the faster growing regions.
This week’s offering of Insights across ASEAN@Smartkarmais filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up pieces. Please find a brief summary below, with a fuller write up in the detailed section.
In Part 5 of a Smartkarma Originals series, Indonesia Property – In Search of the End of the Rainbow – Part 5 – Summarecon Agung (SMRA IJ), CrossASEAN Insight Provider Jessica Irenelooks in detail at this leading township developer. The company has over 40 years of track record and a combined development area of over 2,700ha. The company benefits from its exposure to the popular Serpong district, but an over-expansion, coupled with tightening property regulations caused its balance sheet to suffer in the following years. Earnings have declined by -19% Cagr over the past five years as a consequence of lower margins and burgeoning debt levels. The company has plans to divest its retail mall division, which can serve as a positive catalyst in the near term. Improving sentiment and better interest rate environment, as well as positive regulatory tailwinds, should be a driver to SMRA’s share price this year. We see a 44% upside to our target price of IDR1,408 per share.
In Singapore Real Deals (Issue 5): The Largest Condominium in Singapore, Anni Kum presents a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In this issue, she looks at the launch of Treasure at Tampines in District 18, the largest condominium in Singapore to-date. (Official launch last weekend).
In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks.
The fifth company that we explore is Summarecon Agung (SMRA IJ), a township developer with over 40 years of track record and a combined development area of over 2,700ha. The company benefits from its exposure to the popular Serpong district, but an over expansion, coupled with tightening property regulations caused its balance sheet to suffer in the following years. Earnings have declined by -19% Cagr over the past five years as a consequence of lower margins and burgeoning debt levels.
The company has plans to divest its retail mall division, which can serve as a positive catalyst in the near term. Improving sentiment and better interest rate environment, as well as positive regulatory tailwinds should be a driver to SMRA’s share price this year. We see a 44% upside to our target price of IDR1,408 per share.
Summary of this insight:
The success of SMRA’s first township, Kelapa Gading, paved way for the next six township development. The same township model is replicated to its Serpong, Bekasi, Bandung, Karawang, Makassar, and soon Bogor.
During the height of the property boom, every cluster launch in the Serpong area is 2-3x oversubscribed. Buyers were a mix of speculators and end-users, and both were happy customers benefiting from over 400% land price appreciation over the course of 2009-2013. Land ASP in 2009 was just below IDR3mn versus IDR12-15mn in 2013.
Driven by the positive momentum of the property boom, SMRA ambitiously launched three new townships at the trough of the property market (2015-2018), growing its total township development area by more than a third. Poor cashflow management, stemming from the over-expansion during the property downturn took a massive toll on the balance sheet. SMRA turned from net cash in 2013 to holding IDR8.6tn of debt in 9M18 (1.2x gearing) with interest costs making up a chunky 49% of EBIT.
We have also seen a massive shift to the end-user market since 2014, as the company started to sell more smaller houses and affordable apartments rather than land lots and shophouses. At the peak, shophouses and land lots made up more than 50% of the company’s development revenues. As of 9M18, that number has declined to a mere 7% of revenues, while 93% comes from houses and apartments. Housing units launched in 2016-2017 are 36% cheaper than units launched in 2011-2014, as the company downsized in the area.
SMRA has the second biggest retail mall portfolio in our coverage after Pakuwon Jati (PWON IJ) with 258,000sqm net leasable area (NLA). The three malls generate about IDR1.3tn revenue per year, returning 42% EBITDA margin. About 40% of tenants in Bekasi and Serpong are up for a rental renewal in the next three years, and this could serve as a potential upside on the average rental rates.
Pros: Bank Indonesia (BI)’s move to loosen mortgage regulations last year, and plans to reduce luxury taxes and allow for friendlier foreign ownership scheme should give a breath of fresh air over the medium term. SMRA targets 18% presales growth in 2019, but they have been missing their presales target by an average of 22% over the past three years. We expect a more modest 5% presales recovery this year.
Pros: Margin on houses show a massive improvement from 51% in 2014 to 59% in 9M18. The improvement brings up the consolidated property development margin by 600bps YoY. As a segment, this is the first margin uptick since 2014, leading to 44% YoY EBIT growth and 115% YoY NPAT growth in 9M18.
Cons: The stellar property development growth, however, is diluted by the poor performances from the investment property division that recorded 14% YoY EBIT decline. Despite some improvements on the gross margin level and healthy topline growth, opex has doubled YoY, leading to 700bps reduction in the EBITDA margin.
Recommendation & catalyst: SMRA has underperformed the JCI by a steep 71% over the past 36 months as earnings and presales continue to disappoint. Discount to NAV, PE, and PB valuation are standing at -1 standard deviation below mean. Improving risk appetite for high beta stocks, better interest rate environment, accomodative policies from the government, and potential pick up of activity after the election are a few of the key catalysts for the stock and sector re-rating. The divestment of its retail arm should also help to clear some debt off the balance sheet and unlock value. We have a BUY recommendation.
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During recent earnings calls memory chip makers have postulated that the market will return to higher margins once price elasticity causes demand to increase. This popular myth needs to be treated with great skepticism since, as this Insight will reveal, short-term price elasticity has a negligible impact upon memory chip sales if it has any impact at all.
Airport connectivity in Indonesia has reached a milestone last year when they announced the airport express but has there been any improvements in the service and load factor? The management company, Railink, definitely tries its best to upkeep their service level and increase awareness. Indonesian usage of internet through smartphones also tells about how important smartphones as a center of their daily life.
Blue Bird (BIRD IJ) has gone creative when it comes to increase their online and offline presence; not only having an app that is comparable to Grab and Uber but also creating a dedicated taxi waiting area in a mall. Is Go-jek only a ride hailing app? My experience on Go-send tells otherwise.
How about the upcoming Presidential election? What will happen in a rematch between Jokowi vs Prabowo? Does Prabowo really have no economic policy? His answer when asked on what sort of supportive policies to help Unicorns grow shed some light on his understandings and knowledge on economic policy.
Volatility set to rise as Thailand, Indonesia and India all Face ElectionsRussia: Michael Calvey, a US citizen and one of Russia’s most prominent foreign investors, has been detained.
Indonesia: Incumbent President and his challenger from the military are trying to outdo each other in spending largesse targeting rural poor ahead of the May election.
South Africa: Recent inflation readings have been the lowest in a long time on lower fuel expenses. Expected to stay low.
In this series under Smartkarma Originals, CrossASEAN Research insight providers Angus Mackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks.
The second company we explore is leading township developer Bumi Serpong Damai (BSDE IJ), with exposure ranging from landed housing, shophouses, condominiums, as well as the defensive and growing buffer of nearly 20% of revenues coming from recurrent rental income.
Bumi Serpong Damai (BSDE IJ) has one of the largest land banks of any developer, with a land bank of over 4,000 ha, more than half of which is in its flagship township of BSD City in Serpong.
Given its breadth of exposure to the property segment, the company has the flexibility to switch its exposure between different segments depending on the health of the overall market.
Its projects are well connected by toll-roads and railway but it is well positioned to benefit from new infrastructure such as the new MRT, LRT, as well as new toll road extensions, which will enhance the attractiveness of its developments.
Management suggests that they will take a cautious start to the year ahead of the election but see a window for a pick-up in marketing sales in May, with the potential for a much better 2H19.
Despite a run-up in the share price since the start of the year, valuations do not look challenging from a historical basis especially looking at its PBV. It also trades at a significant discount to NAV of 67%, as well as being below its 5 yr historical mean on a forward PER basis.
Catalysts ahead include a post-election pick-up in activity leading to more project launches, completion of infrastructure projects, aggressive mortgage lending by the banks, and a more dovish interest rate outlook. Valuations are already attractive but a rise in property market activity should also lead to earnings upgrades, which if sustained, may lead to property prices moving upwards.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
According to SEMI, North American (NA) WFE sales for January 2019 fell to $1.9 billion, down ~10% sequentially and ~20% YoY. This was an abrupt reversal of the recovery trend implied by the December 2018 sales of $2.1 billion and is the biggest monthly sales YoY decline since June 2013.
Just as declining monthly WFE sales preceded the current semiconductor downturn by some six months, the continuation of December’s MoM WFE decline reversal trend was a prerequisite for a second half recovery in the broader semiconductor sector. With that trend well and truly broken, we now anticipate a more delayed, gradual and prolonged recovery, one which is now unlikely to materialise until late third, early fourth quarter 2019.
In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks.
The first company that we explore is Ciputra Development (CTRA IJ), a township developer with 38 years of track record. With 75 ongoing township projects in 33 cities, CTRA has the widest coverage of any developer in Indonesia. However, tightening policies by the Bank Indonesia (BI), in particular the presales mortgage disbursement regulation caused a significant drop in operating cashflow and increased gearing level.
Earnings have been on a downtrend, as slower revenue recognition coupled with higher interest costs have weighed on the bottom line. As BI has recently started to relax property regulations, we may begin to see some positive impact on cash flows over the next few quarters, although earnings are likely to remain weak from declining presales over the past three years.
As we enter the election year, presales announcements may not be positive in the short term, but activities may improve after the electoral contest, helped by a pick up in sentiment and boosted by a better interest rate environment and positive regulatory tailwinds. Potential portfolio inflow to high beta stocks and rising risk appetite for smaller cap underperforming stocks should also drive CTRA’s share price outperformance in 2019. We see a 50% upside to our target price of IDR1,352 per share.
Summary of this insight:
The property development product portfolio includes landed housing, high-rise condominiums, and offices. Landed housing projects are still CTRA’s bread and butter, comprising more than half of the company’s revenue and more than two-thirds of presales. As the property demand is currently dominated by the end-users, CTRA’s product offering is shifting towards smaller more affordable units. We have put together an example mortgage calculation and determine a key affordability level based on the average income per capita in the Greater Jakarta to illustrate how much should a housing unit be worth for the end users market.
The investment properties portfolio consists of 4 malls, 9 hotels, and 4 hospitals across the major cities in Indonesia, making up 13%, 8%, and 6% of 9M18 total consolidated revenues respectively. This is a 68% increase in revenue contribution versus five years ago. The company has been actively building its investment property portfolio to weather out the volatility in the non-recurring or development revenue.
Accessibility is a key factor to land appreciation and hence, company’s total NAV. With the traffic worsening around the Greater Jakarta area, time to commute is an increasingly important factor in determining where to stay and access to public transportation such as MRT and LRT will be a powerful driver going forward. CTRA has a very diverse property development portfolio, hence the benefit of the infrastructure rollout is more widespread across the different projects.
65% of CTRA’s presales are generated from units priced IDR2bn and below, which indicate that the majority of CTRA’s buyers are in the middle to middle-low segments. These buyers are price sensitive and are highly dependent on financing. CTRA’s mortgage and in-house installment proportion is one of the highest in our property universe, making the company more susceptible to the changes in the property mortgage regulation by the Central Bank (BI).
The property mortgage regulation in Indonesia has had few rounds of changes in the past decade, with a series of tightening measures taking place between 2013-2014, and the start of loosening measures in 2016-2018. We will discuss in depth the various property regulations issued and its impact on CTRA’s cashflow. We also constructed a cashflow simulation time series for a sample housing sale to determine the time needed for the project to turn net cashflow positive and when can the developer reinvest for future landbank of equivalent value.
Pros: as we expect a better rate of cash inflow from future mortgages, our model shows that the advances-to-inventory ratio, which is an indicative figure for the property developers’ working capital, will begin to rise in 2019, leading to an inflection point for CTRA’s FCF. One-off adjustment in the earlier booking of 2019’s first mortgage disbursement is the key driver.
Cons: CTRA booked three consecutive years of negative presales growth with a decline rate of -11% Cagr. This indicates that the accounting revenue growth will more likely be weaker over the next 12-18 months. We also estimate that margin should continue to trend down until 2020. As we continue to see a larger proportion of units priced below IDR1bn in the past 2 years, it is unlikely to see a pick up in margin in 2019-2020.
Cons: Election year to election year, we may see some similarity between the 2014 and 2019’s quarterly presales split. 1Q14 and 2Q14 contributed 41% to total FY14 presales, while 4Q14 contributed a chunky 33%. If we assume the same quarterly split for 2019 presales target, we may potentially see 13%-27% YoY declines in the next three quarters of presales reporting. Note however that the BI issued its first round of tightening regulations at the end of 2013 and this may have an impact to the 1H14 presales. Also there is a difference in the election schedules as the 2014 election was dragged on until late August, while the 2019 contest will be done by end of April.
Recommendation & catalyst: CTRA share price has underperformed the JCI by 24% in the past 12 months. Though the share price has a nice 28% rebound from its 5-year low point, CTRA’s discount to net asset value (NAV) and price-to-book (PB) ratio is still at more than -1 standard deviation below its historical mean. Its price-to-earnings (PE) ratio however is only slightly below the historical mean. Improving risk appetite for high beta stocks, better interest rate environment, accomodative policies from the government, and potential pick up of activity after the election are a few of the key catalysts for the stock and sector. This underlines our BUY recommendation on CTRA with 50% upside. Our bull case scenario of rerating to +1 standard deviation above mean valuation offers 26% additional upside to our TP.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
According to SEMI, North American (NA) WFE sales for January 2019 fell to $1.9 billion, down ~10% sequentially and ~20% YoY. This was an abrupt reversal of the recovery trend implied by the December 2018 sales of $2.1 billion and is the biggest monthly sales YoY decline since June 2013.
Just as declining monthly WFE sales preceded the current semiconductor downturn by some six months, the continuation of December’s MoM WFE decline reversal trend was a prerequisite for a second half recovery in the broader semiconductor sector. With that trend well and truly broken, we now anticipate a more delayed, gradual and prolonged recovery, one which is now unlikely to materialise until late third, early fourth quarter 2019.
In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks.
The first company that we explore is Ciputra Development (CTRA IJ), a township developer with 38 years of track record. With 75 ongoing township projects in 33 cities, CTRA has the widest coverage of any developer in Indonesia. However, tightening policies by the Bank Indonesia (BI), in particular the presales mortgage disbursement regulation caused a significant drop in operating cashflow and increased gearing level.
Earnings have been on a downtrend, as slower revenue recognition coupled with higher interest costs have weighed on the bottom line. As BI has recently started to relax property regulations, we may begin to see some positive impact on cash flows over the next few quarters, although earnings are likely to remain weak from declining presales over the past three years.
As we enter the election year, presales announcements may not be positive in the short term, but activities may improve after the electoral contest, helped by a pick up in sentiment and boosted by a better interest rate environment and positive regulatory tailwinds. Potential portfolio inflow to high beta stocks and rising risk appetite for smaller cap underperforming stocks should also drive CTRA’s share price outperformance in 2019. We see a 50% upside to our target price of IDR1,352 per share.
Summary of this insight:
The property development product portfolio includes landed housing, high-rise condominiums, and offices. Landed housing projects are still CTRA’s bread and butter, comprising more than half of the company’s revenue and more than two-thirds of presales. As the property demand is currently dominated by the end-users, CTRA’s product offering is shifting towards smaller more affordable units. We have put together an example mortgage calculation and determine a key affordability level based on the average income per capita in the Greater Jakarta to illustrate how much should a housing unit be worth for the end users market.
The investment properties portfolio consists of 4 malls, 9 hotels, and 4 hospitals across the major cities in Indonesia, making up 13%, 8%, and 6% of 9M18 total consolidated revenues respectively. This is a 68% increase in revenue contribution versus five years ago. The company has been actively building its investment property portfolio to weather out the volatility in the non-recurring or development revenue.
Accessibility is a key factor to land appreciation and hence, company’s total NAV. With the traffic worsening around the Greater Jakarta area, time to commute is an increasingly important factor in determining where to stay and access to public transportation such as MRT and LRT will be a powerful driver going forward. CTRA has a very diverse property development portfolio, hence the benefit of the infrastructure rollout is more widespread across the different projects.
65% of CTRA’s presales are generated from units priced IDR2bn and below, which indicate that the majority of CTRA’s buyers are in the middle to middle-low segments. These buyers are price sensitive and are highly dependent on financing. CTRA’s mortgage and in-house installment proportion is one of the highest in our property universe, making the company more susceptible to the changes in the property mortgage regulation by the Central Bank (BI).
The property mortgage regulation in Indonesia has had few rounds of changes in the past decade, with a series of tightening measures taking place between 2013-2014, and the start of loosening measures in 2016-2018. We will discuss in depth the various property regulations issued and its impact on CTRA’s cashflow. We also constructed a cashflow simulation time series for a sample housing sale to determine the time needed for the project to turn net cashflow positive and when can the developer reinvest for future landbank of equivalent value.
Pros: as we expect a better rate of cash inflow from future mortgages, our model shows that the advances-to-inventory ratio, which is an indicative figure for the property developers’ working capital, will begin to rise in 2019, leading to an inflection point for CTRA’s FCF. One-off adjustment in the earlier booking of 2019’s first mortgage disbursement is the key driver.
Cons: CTRA booked three consecutive years of negative presales growth with a decline rate of -11% Cagr. This indicates that the accounting revenue growth will more likely be weaker over the next 12-18 months. We also estimate that margin should continue to trend down until 2020. As we continue to see a larger proportion of units priced below IDR1bn in the past 2 years, it is unlikely to see a pick up in margin in 2019-2020.
Cons: Election year to election year, we may see some similarity between the 2014 and 2019’s quarterly presales split. 1Q14 and 2Q14 contributed 41% to total FY14 presales, while 4Q14 contributed a chunky 33%. If we assume the same quarterly split for 2019 presales target, we may potentially see 13%-27% YoY declines in the next three quarters of presales reporting. Note however that the BI issued its first round of tightening regulations at the end of 2013 and this may have an impact to the 1H14 presales. Also there is a difference in the election schedules as the 2014 election was dragged on until late August, while the 2019 contest will be done by end of April.
Recommendation & catalyst: CTRA share price has underperformed the JCI by 24% in the past 12 months. Though the share price has a nice 28% rebound from its 5-year low point, CTRA’s discount to net asset value (NAV) and price-to-book (PB) ratio is still at more than -1 standard deviation below its historical mean. Its price-to-earnings (PE) ratio however is only slightly below the historical mean. Improving risk appetite for high beta stocks, better interest rate environment, accomodative policies from the government, and potential pick up of activity after the election are a few of the key catalysts for the stock and sector. This underlines our BUY recommendation on CTRA with 50% upside. Our bull case scenario of rerating to +1 standard deviation above mean valuation offers 26% additional upside to our TP.
US private LNG company Venture Global is starting construction on its 10 million ton per annum (mtpa) US LNG export facility in Louisiana after gaining approval from the US Federal Energy Regulatory Commission (FERC). This is positive for the LNG contractor market and we discuss the companies involved in the project.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
According to SEMI, North American (NA) WFE sales for January 2019 fell to $1.9 billion, down ~10% sequentially and ~20% YoY. This was an abrupt reversal of the recovery trend implied by the December 2018 sales of $2.1 billion and is the biggest monthly sales YoY decline since June 2013.
Just as declining monthly WFE sales preceded the current semiconductor downturn by some six months, the continuation of December’s MoM WFE decline reversal trend was a prerequisite for a second half recovery in the broader semiconductor sector. With that trend well and truly broken, we now anticipate a more delayed, gradual and prolonged recovery, one which is now unlikely to materialise until late third, early fourth quarter 2019.
In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks.
The first company that we explore is Ciputra Development (CTRA IJ), a township developer with 38 years of track record. With 75 ongoing township projects in 33 cities, CTRA has the widest coverage of any developer in Indonesia. However, tightening policies by the Bank Indonesia (BI), in particular the presales mortgage disbursement regulation caused a significant drop in operating cashflow and increased gearing level.
Earnings have been on a downtrend, as slower revenue recognition coupled with higher interest costs have weighed on the bottom line. As BI has recently started to relax property regulations, we may begin to see some positive impact on cash flows over the next few quarters, although earnings are likely to remain weak from declining presales over the past three years.
As we enter the election year, presales announcements may not be positive in the short term, but activities may improve after the electoral contest, helped by a pick up in sentiment and boosted by a better interest rate environment and positive regulatory tailwinds. Potential portfolio inflow to high beta stocks and rising risk appetite for smaller cap underperforming stocks should also drive CTRA’s share price outperformance in 2019. We see a 50% upside to our target price of IDR1,352 per share.
Summary of this insight:
The property development product portfolio includes landed housing, high-rise condominiums, and offices. Landed housing projects are still CTRA’s bread and butter, comprising more than half of the company’s revenue and more than two-thirds of presales. As the property demand is currently dominated by the end-users, CTRA’s product offering is shifting towards smaller more affordable units. We have put together an example mortgage calculation and determine a key affordability level based on the average income per capita in the Greater Jakarta to illustrate how much should a housing unit be worth for the end users market.
The investment properties portfolio consists of 4 malls, 9 hotels, and 4 hospitals across the major cities in Indonesia, making up 13%, 8%, and 6% of 9M18 total consolidated revenues respectively. This is a 68% increase in revenue contribution versus five years ago. The company has been actively building its investment property portfolio to weather out the volatility in the non-recurring or development revenue.
Accessibility is a key factor to land appreciation and hence, company’s total NAV. With the traffic worsening around the Greater Jakarta area, time to commute is an increasingly important factor in determining where to stay and access to public transportation such as MRT and LRT will be a powerful driver going forward. CTRA has a very diverse property development portfolio, hence the benefit of the infrastructure rollout is more widespread across the different projects.
65% of CTRA’s presales are generated from units priced IDR2bn and below, which indicate that the majority of CTRA’s buyers are in the middle to middle-low segments. These buyers are price sensitive and are highly dependent on financing. CTRA’s mortgage and in-house installment proportion is one of the highest in our property universe, making the company more susceptible to the changes in the property mortgage regulation by the Central Bank (BI).
The property mortgage regulation in Indonesia has had few rounds of changes in the past decade, with a series of tightening measures taking place between 2013-2014, and the start of loosening measures in 2016-2018. We will discuss in depth the various property regulations issued and its impact on CTRA’s cashflow. We also constructed a cashflow simulation time series for a sample housing sale to determine the time needed for the project to turn net cashflow positive and when can the developer reinvest for future landbank of equivalent value.
Pros: as we expect a better rate of cash inflow from future mortgages, our model shows that the advances-to-inventory ratio, which is an indicative figure for the property developers’ working capital, will begin to rise in 2019, leading to an inflection point for CTRA’s FCF. One-off adjustment in the earlier booking of 2019’s first mortgage disbursement is the key driver.
Cons: CTRA booked three consecutive years of negative presales growth with a decline rate of -11% Cagr. This indicates that the accounting revenue growth will more likely be weaker over the next 12-18 months. We also estimate that margin should continue to trend down until 2020. As we continue to see a larger proportion of units priced below IDR1bn in the past 2 years, it is unlikely to see a pick up in margin in 2019-2020.
Cons: Election year to election year, we may see some similarity between the 2014 and 2019’s quarterly presales split. 1Q14 and 2Q14 contributed 41% to total FY14 presales, while 4Q14 contributed a chunky 33%. If we assume the same quarterly split for 2019 presales target, we may potentially see 13%-27% YoY declines in the next three quarters of presales reporting. Note however that the BI issued its first round of tightening regulations at the end of 2013 and this may have an impact to the 1H14 presales. Also there is a difference in the election schedules as the 2014 election was dragged on until late August, while the 2019 contest will be done by end of April.
Recommendation & catalyst: CTRA share price has underperformed the JCI by 24% in the past 12 months. Though the share price has a nice 28% rebound from its 5-year low point, CTRA’s discount to net asset value (NAV) and price-to-book (PB) ratio is still at more than -1 standard deviation below its historical mean. Its price-to-earnings (PE) ratio however is only slightly below the historical mean. Improving risk appetite for high beta stocks, better interest rate environment, accomodative policies from the government, and potential pick up of activity after the election are a few of the key catalysts for the stock and sector. This underlines our BUY recommendation on CTRA with 50% upside. Our bull case scenario of rerating to +1 standard deviation above mean valuation offers 26% additional upside to our TP.
US private LNG company Venture Global is starting construction on its 10 million ton per annum (mtpa) US LNG export facility in Louisiana after gaining approval from the US Federal Energy Regulatory Commission (FERC). This is positive for the LNG contractor market and we discuss the companies involved in the project.
Headwinds linger, but are beginning to lose velocity as consumers defy macro fears.
VIP slowdown should peak by Q3 and begin northward creep as bankrolls replenish.
Valuations today do not yet fully reflect the beginnings of a sector recovery.
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Energy Transfer LP (ET US) and Royal Dutch Shell (RDSA LN) have signed a Project Framework Agreement to further develop a large-scale LNG export facility in Lake Charles, Louisiana and move toward a potential final investment decision (FID). They have started actively engaging with LNG Engineering, Procurement and Contracting (EPC) companies with a plan to issue an Invitation to Tender (ITT) in the weeks ahead. We look at the potential contract size and winners and also the other US LNG projects that could be negatively impacted. More detail on the LNG project queue for this year in: A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies.
Leong Hup International (LEHUP MK) (LHI) plans to raise up to US$400m in its Malaysian IPO. LHI is one of the largest integrated poultry producer in Southeast Asia.
LHI was listed on Bursa Malaysia from 1990 to 2012. Since delisting, it has consolidated its Southeast Asia operations under a single entity and is now looking to relist the larger entity.
While revenue has been growing steadily, margins have been volatile. In addition, its difficult to pinpoint which products are performing well in which geographies. The feedmills business seems to be a more consistent performer as compared to the livestock business. It’s also a larger revenue contributor in the faster growing regions.
This week’s offering of Insights across ASEAN@Smartkarmais filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up pieces. Please find a brief summary below, with a fuller write up in the detailed section.
In Part 5 of a Smartkarma Originals series, Indonesia Property – In Search of the End of the Rainbow – Part 5 – Summarecon Agung (SMRA IJ), CrossASEAN Insight Provider Jessica Irenelooks in detail at this leading township developer. The company has over 40 years of track record and a combined development area of over 2,700ha. The company benefits from its exposure to the popular Serpong district, but an over-expansion, coupled with tightening property regulations caused its balance sheet to suffer in the following years. Earnings have declined by -19% Cagr over the past five years as a consequence of lower margins and burgeoning debt levels. The company has plans to divest its retail mall division, which can serve as a positive catalyst in the near term. Improving sentiment and better interest rate environment, as well as positive regulatory tailwinds, should be a driver to SMRA’s share price this year. We see a 44% upside to our target price of IDR1,408 per share.
In Singapore Real Deals (Issue 5): The Largest Condominium in Singapore, Anni Kum presents a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In this issue, she looks at the launch of Treasure at Tampines in District 18, the largest condominium in Singapore to-date. (Official launch last weekend).
In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks.
The fifth company that we explore is Summarecon Agung (SMRA IJ), a township developer with over 40 years of track record and a combined development area of over 2,700ha. The company benefits from its exposure to the popular Serpong district, but an over expansion, coupled with tightening property regulations caused its balance sheet to suffer in the following years. Earnings have declined by -19% Cagr over the past five years as a consequence of lower margins and burgeoning debt levels.
The company has plans to divest its retail mall division, which can serve as a positive catalyst in the near term. Improving sentiment and better interest rate environment, as well as positive regulatory tailwinds should be a driver to SMRA’s share price this year. We see a 44% upside to our target price of IDR1,408 per share.
Summary of this insight:
The success of SMRA’s first township, Kelapa Gading, paved way for the next six township development. The same township model is replicated to its Serpong, Bekasi, Bandung, Karawang, Makassar, and soon Bogor.
During the height of the property boom, every cluster launch in the Serpong area is 2-3x oversubscribed. Buyers were a mix of speculators and end-users, and both were happy customers benefiting from over 400% land price appreciation over the course of 2009-2013. Land ASP in 2009 was just below IDR3mn versus IDR12-15mn in 2013.
Driven by the positive momentum of the property boom, SMRA ambitiously launched three new townships at the trough of the property market (2015-2018), growing its total township development area by more than a third. Poor cashflow management, stemming from the over-expansion during the property downturn took a massive toll on the balance sheet. SMRA turned from net cash in 2013 to holding IDR8.6tn of debt in 9M18 (1.2x gearing) with interest costs making up a chunky 49% of EBIT.
We have also seen a massive shift to the end-user market since 2014, as the company started to sell more smaller houses and affordable apartments rather than land lots and shophouses. At the peak, shophouses and land lots made up more than 50% of the company’s development revenues. As of 9M18, that number has declined to a mere 7% of revenues, while 93% comes from houses and apartments. Housing units launched in 2016-2017 are 36% cheaper than units launched in 2011-2014, as the company downsized in the area.
SMRA has the second biggest retail mall portfolio in our coverage after Pakuwon Jati (PWON IJ) with 258,000sqm net leasable area (NLA). The three malls generate about IDR1.3tn revenue per year, returning 42% EBITDA margin. About 40% of tenants in Bekasi and Serpong are up for a rental renewal in the next three years, and this could serve as a potential upside on the average rental rates.
Pros: Bank Indonesia (BI)’s move to loosen mortgage regulations last year, and plans to reduce luxury taxes and allow for friendlier foreign ownership scheme should give a breath of fresh air over the medium term. SMRA targets 18% presales growth in 2019, but they have been missing their presales target by an average of 22% over the past three years. We expect a more modest 5% presales recovery this year.
Pros: Margin on houses show a massive improvement from 51% in 2014 to 59% in 9M18. The improvement brings up the consolidated property development margin by 600bps YoY. As a segment, this is the first margin uptick since 2014, leading to 44% YoY EBIT growth and 115% YoY NPAT growth in 9M18.
Cons: The stellar property development growth, however, is diluted by the poor performances from the investment property division that recorded 14% YoY EBIT decline. Despite some improvements on the gross margin level and healthy topline growth, opex has doubled YoY, leading to 700bps reduction in the EBITDA margin.
Recommendation & catalyst: SMRA has underperformed the JCI by a steep 71% over the past 36 months as earnings and presales continue to disappoint. Discount to NAV, PE, and PB valuation are standing at -1 standard deviation below mean. Improving risk appetite for high beta stocks, better interest rate environment, accomodative policies from the government, and potential pick up of activity after the election are a few of the key catalysts for the stock and sector re-rating. The divestment of its retail arm should also help to clear some debt off the balance sheet and unlock value. We have a BUY recommendation.
The presidential race is unchanged as data from a premier polling firm, SMRC, shows a 26 percentage point lead for Widodo. Thus far only one poll has shown a narrow lead — 12 percent, according to Kompas — but until other data corroborates this, it appears to be an outlier that does not change the outlook. Widodo is heavily touting the MRT opening, but provincial leaders are struggling to set a tariff rate — it will therefore still be free when it opens for public use on 25 March. The Religion Ministry appointments-graft scandal threatens to implicate the minister. Trade acrimony with the EU is escalating. West Java Governor Ridwan Kamil, a 2024 presidential contender, garnered negative publicity for appointing relatives. Legislators and stakeholders are clamoring for government progress on a draft Bill on Personal Data Protection.
Politics: Eager to maximize advantages from the imminent commercial start of Jakarta’s Mass Rapid Transit (MRT) line, President Joko Widodo claimed credit for having made a “political decision” to take on the project’s cost. In fact, the magnitude of those costs to the province remains unclear: three days from the start of operations, policymakers have yet to set the tariff for riders (Page 2). The corruption scandal enveloping the Islamic United Development Party (PPP) – at the worst possible time in the election cycle – could further depress the clout of Islamic interests in the next parliament (p. 3). West Java Governor Ridwan Kamil invited criticism by appointing two relatives to a high-profile Development Acceleration Team (TAP) under his aegis (p. 4).
Surveys: The large lead for President Joko Widodo appears intact, based on findings from three recent polls, although one reputable agency produced divergent results. Widodo has a lead of at least 19 percentage points according to three surveys in late February and March: in addition to the Survey Network (LSI) and Alvara Research (discussed in recent Ref Wkly editions), new data has emerged from Saiful Mujani Research and Consulting (SMRC) placing Widodo’s margin over Prabowo at 26 percentage points. A poll conducted simultaneously by Kompas measured the lead at only 12 percentage points – but until other polling corroborates this, it constitutes an outlier that lacks significance. In any event, even if Widodo’s lead has shrunk as much as Kompas claims, he would still enjoy a comfortable cushion (p. 4).
Justice: Religion Minister Lukman Saefuddin is under scrutiny after investigators discovered Rp600 million in cash in his office desk drawer. Meanwhile, former PPP Chair Romahurmuziy failed to appear for questioning as a suspect (p. 7).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Policy News: Public officials clamored for a long-awaited Bill on Protecting Personal Data (RUU PDP) (p. 8). Energy Minister Ignatius Jonan welcomed a parliamentary suggestion to subsidize the higher-octane petroleum product Pertamax, rather than Premium – but he remained noncommittal about implementation (p. 9).
Infrastructure: Jakarta’s governor rejected suggestions from provincial legislators that the MRT should be free, or at least free for Jakarta residents (p. 10).
International: Policymakers denounced the European Union (EU) for allegedly discriminating against biodiesel from crude palm oil (CPO). The planned Comprehensive Partnership Agreement with Europe (IEU‑Cepa) could be at risk (p. 11).
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks.
The first company that we explore is Ciputra Development (CTRA IJ), a township developer with 38 years of track record. With 75 ongoing township projects in 33 cities, CTRA has the widest coverage of any developer in Indonesia. However, tightening policies by the Bank Indonesia (BI), in particular the presales mortgage disbursement regulation caused a significant drop in operating cashflow and increased gearing level.
Earnings have been on a downtrend, as slower revenue recognition coupled with higher interest costs have weighed on the bottom line. As BI has recently started to relax property regulations, we may begin to see some positive impact on cash flows over the next few quarters, although earnings are likely to remain weak from declining presales over the past three years.
As we enter the election year, presales announcements may not be positive in the short term, but activities may improve after the electoral contest, helped by a pick up in sentiment and boosted by a better interest rate environment and positive regulatory tailwinds. Potential portfolio inflow to high beta stocks and rising risk appetite for smaller cap underperforming stocks should also drive CTRA’s share price outperformance in 2019. We see a 50% upside to our target price of IDR1,352 per share.
Summary of this insight:
The property development product portfolio includes landed housing, high-rise condominiums, and offices. Landed housing projects are still CTRA’s bread and butter, comprising more than half of the company’s revenue and more than two-thirds of presales. As the property demand is currently dominated by the end-users, CTRA’s product offering is shifting towards smaller more affordable units. We have put together an example mortgage calculation and determine a key affordability level based on the average income per capita in the Greater Jakarta to illustrate how much should a housing unit be worth for the end users market.
The investment properties portfolio consists of 4 malls, 9 hotels, and 4 hospitals across the major cities in Indonesia, making up 13%, 8%, and 6% of 9M18 total consolidated revenues respectively. This is a 68% increase in revenue contribution versus five years ago. The company has been actively building its investment property portfolio to weather out the volatility in the non-recurring or development revenue.
Accessibility is a key factor to land appreciation and hence, company’s total NAV. With the traffic worsening around the Greater Jakarta area, time to commute is an increasingly important factor in determining where to stay and access to public transportation such as MRT and LRT will be a powerful driver going forward. CTRA has a very diverse property development portfolio, hence the benefit of the infrastructure rollout is more widespread across the different projects.
65% of CTRA’s presales are generated from units priced IDR2bn and below, which indicate that the majority of CTRA’s buyers are in the middle to middle-low segments. These buyers are price sensitive and are highly dependent on financing. CTRA’s mortgage and in-house installment proportion is one of the highest in our property universe, making the company more susceptible to the changes in the property mortgage regulation by the Central Bank (BI).
The property mortgage regulation in Indonesia has had few rounds of changes in the past decade, with a series of tightening measures taking place between 2013-2014, and the start of loosening measures in 2016-2018. We will discuss in depth the various property regulations issued and its impact on CTRA’s cashflow. We also constructed a cashflow simulation time series for a sample housing sale to determine the time needed for the project to turn net cashflow positive and when can the developer reinvest for future landbank of equivalent value.
Pros: as we expect a better rate of cash inflow from future mortgages, our model shows that the advances-to-inventory ratio, which is an indicative figure for the property developers’ working capital, will begin to rise in 2019, leading to an inflection point for CTRA’s FCF. One-off adjustment in the earlier booking of 2019’s first mortgage disbursement is the key driver.
Cons: CTRA booked three consecutive years of negative presales growth with a decline rate of -11% Cagr. This indicates that the accounting revenue growth will more likely be weaker over the next 12-18 months. We also estimate that margin should continue to trend down until 2020. As we continue to see a larger proportion of units priced below IDR1bn in the past 2 years, it is unlikely to see a pick up in margin in 2019-2020.
Cons: Election year to election year, we may see some similarity between the 2014 and 2019’s quarterly presales split. 1Q14 and 2Q14 contributed 41% to total FY14 presales, while 4Q14 contributed a chunky 33%. If we assume the same quarterly split for 2019 presales target, we may potentially see 13%-27% YoY declines in the next three quarters of presales reporting. Note however that the BI issued its first round of tightening regulations at the end of 2013 and this may have an impact to the 1H14 presales. Also there is a difference in the election schedules as the 2014 election was dragged on until late August, while the 2019 contest will be done by end of April.
Recommendation & catalyst: CTRA share price has underperformed the JCI by 24% in the past 12 months. Though the share price has a nice 28% rebound from its 5-year low point, CTRA’s discount to net asset value (NAV) and price-to-book (PB) ratio is still at more than -1 standard deviation below its historical mean. Its price-to-earnings (PE) ratio however is only slightly below the historical mean. Improving risk appetite for high beta stocks, better interest rate environment, accomodative policies from the government, and potential pick up of activity after the election are a few of the key catalysts for the stock and sector. This underlines our BUY recommendation on CTRA with 50% upside. Our bull case scenario of rerating to +1 standard deviation above mean valuation offers 26% additional upside to our TP.
US private LNG company Venture Global is starting construction on its 10 million ton per annum (mtpa) US LNG export facility in Louisiana after gaining approval from the US Federal Energy Regulatory Commission (FERC). This is positive for the LNG contractor market and we discuss the companies involved in the project.
Bank Tabungan Negara Persero (BBTN IJ) appears to have a nasty combination of high Special Mention Loans (SMLs) and elevated “past due but unimpaired Loans”.
The implication is that provisioning levels are insufficient in an environment of eroding asset quality.
But the bank continues to grow credit by around 20% YoY.
The bank is hugely exposed to the retail real estate market (91% of Loans).
In fact, the Indonesian Banking Sector is rife with high SMLs and in some cases elevated “past due but unimpaired Loans”.
SMLs are traditionally associated with Chinese under-reporting of underlying bad loans, and hence the production of a somewhat flattering Asset Quality picture.
Maybe, the health and valuation of the Indonesian Banking Sector needs to be reassessed with implications for IDR.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Leong Hup International (LEHUP MK) (LHI) plans to raise up to US$400m in its Malaysian IPO. LHI is one of the largest integrated poultry producer in Southeast Asia.
LHI was listed on Bursa Malaysia from 1990 to 2012. Since delisting, it has consolidated its Southeast Asia operations under a single entity and is now looking to relist the larger entity.
While revenue has been growing steadily, margins have been volatile. In addition, its difficult to pinpoint which products are performing well in which geographies. The feedmills business seems to be a more consistent performer as compared to the livestock business. It’s also a larger revenue contributor in the faster growing regions.
This week’s offering of Insights across ASEAN@Smartkarmais filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up pieces. Please find a brief summary below, with a fuller write up in the detailed section.
In Part 5 of a Smartkarma Originals series, Indonesia Property – In Search of the End of the Rainbow – Part 5 – Summarecon Agung (SMRA IJ), CrossASEAN Insight Provider Jessica Irenelooks in detail at this leading township developer. The company has over 40 years of track record and a combined development area of over 2,700ha. The company benefits from its exposure to the popular Serpong district, but an over-expansion, coupled with tightening property regulations caused its balance sheet to suffer in the following years. Earnings have declined by -19% Cagr over the past five years as a consequence of lower margins and burgeoning debt levels. The company has plans to divest its retail mall division, which can serve as a positive catalyst in the near term. Improving sentiment and better interest rate environment, as well as positive regulatory tailwinds, should be a driver to SMRA’s share price this year. We see a 44% upside to our target price of IDR1,408 per share.
In Singapore Real Deals (Issue 5): The Largest Condominium in Singapore, Anni Kum presents a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In this issue, she looks at the launch of Treasure at Tampines in District 18, the largest condominium in Singapore to-date. (Official launch last weekend).
In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks.
The fifth company that we explore is Summarecon Agung (SMRA IJ), a township developer with over 40 years of track record and a combined development area of over 2,700ha. The company benefits from its exposure to the popular Serpong district, but an over expansion, coupled with tightening property regulations caused its balance sheet to suffer in the following years. Earnings have declined by -19% Cagr over the past five years as a consequence of lower margins and burgeoning debt levels.
The company has plans to divest its retail mall division, which can serve as a positive catalyst in the near term. Improving sentiment and better interest rate environment, as well as positive regulatory tailwinds should be a driver to SMRA’s share price this year. We see a 44% upside to our target price of IDR1,408 per share.
Summary of this insight:
The success of SMRA’s first township, Kelapa Gading, paved way for the next six township development. The same township model is replicated to its Serpong, Bekasi, Bandung, Karawang, Makassar, and soon Bogor.
During the height of the property boom, every cluster launch in the Serpong area is 2-3x oversubscribed. Buyers were a mix of speculators and end-users, and both were happy customers benefiting from over 400% land price appreciation over the course of 2009-2013. Land ASP in 2009 was just below IDR3mn versus IDR12-15mn in 2013.
Driven by the positive momentum of the property boom, SMRA ambitiously launched three new townships at the trough of the property market (2015-2018), growing its total township development area by more than a third. Poor cashflow management, stemming from the over-expansion during the property downturn took a massive toll on the balance sheet. SMRA turned from net cash in 2013 to holding IDR8.6tn of debt in 9M18 (1.2x gearing) with interest costs making up a chunky 49% of EBIT.
We have also seen a massive shift to the end-user market since 2014, as the company started to sell more smaller houses and affordable apartments rather than land lots and shophouses. At the peak, shophouses and land lots made up more than 50% of the company’s development revenues. As of 9M18, that number has declined to a mere 7% of revenues, while 93% comes from houses and apartments. Housing units launched in 2016-2017 are 36% cheaper than units launched in 2011-2014, as the company downsized in the area.
SMRA has the second biggest retail mall portfolio in our coverage after Pakuwon Jati (PWON IJ) with 258,000sqm net leasable area (NLA). The three malls generate about IDR1.3tn revenue per year, returning 42% EBITDA margin. About 40% of tenants in Bekasi and Serpong are up for a rental renewal in the next three years, and this could serve as a potential upside on the average rental rates.
Pros: Bank Indonesia (BI)’s move to loosen mortgage regulations last year, and plans to reduce luxury taxes and allow for friendlier foreign ownership scheme should give a breath of fresh air over the medium term. SMRA targets 18% presales growth in 2019, but they have been missing their presales target by an average of 22% over the past three years. We expect a more modest 5% presales recovery this year.
Pros: Margin on houses show a massive improvement from 51% in 2014 to 59% in 9M18. The improvement brings up the consolidated property development margin by 600bps YoY. As a segment, this is the first margin uptick since 2014, leading to 44% YoY EBIT growth and 115% YoY NPAT growth in 9M18.
Cons: The stellar property development growth, however, is diluted by the poor performances from the investment property division that recorded 14% YoY EBIT decline. Despite some improvements on the gross margin level and healthy topline growth, opex has doubled YoY, leading to 700bps reduction in the EBITDA margin.
Recommendation & catalyst: SMRA has underperformed the JCI by a steep 71% over the past 36 months as earnings and presales continue to disappoint. Discount to NAV, PE, and PB valuation are standing at -1 standard deviation below mean. Improving risk appetite for high beta stocks, better interest rate environment, accomodative policies from the government, and potential pick up of activity after the election are a few of the key catalysts for the stock and sector re-rating. The divestment of its retail arm should also help to clear some debt off the balance sheet and unlock value. We have a BUY recommendation.
The presidential race is unchanged as data from a premier polling firm, SMRC, shows a 26 percentage point lead for Widodo. Thus far only one poll has shown a narrow lead — 12 percent, according to Kompas — but until other data corroborates this, it appears to be an outlier that does not change the outlook. Widodo is heavily touting the MRT opening, but provincial leaders are struggling to set a tariff rate — it will therefore still be free when it opens for public use on 25 March. The Religion Ministry appointments-graft scandal threatens to implicate the minister. Trade acrimony with the EU is escalating. West Java Governor Ridwan Kamil, a 2024 presidential contender, garnered negative publicity for appointing relatives. Legislators and stakeholders are clamoring for government progress on a draft Bill on Personal Data Protection.
Politics: Eager to maximize advantages from the imminent commercial start of Jakarta’s Mass Rapid Transit (MRT) line, President Joko Widodo claimed credit for having made a “political decision” to take on the project’s cost. In fact, the magnitude of those costs to the province remains unclear: three days from the start of operations, policymakers have yet to set the tariff for riders (Page 2). The corruption scandal enveloping the Islamic United Development Party (PPP) – at the worst possible time in the election cycle – could further depress the clout of Islamic interests in the next parliament (p. 3). West Java Governor Ridwan Kamil invited criticism by appointing two relatives to a high-profile Development Acceleration Team (TAP) under his aegis (p. 4).
Surveys: The large lead for President Joko Widodo appears intact, based on findings from three recent polls, although one reputable agency produced divergent results. Widodo has a lead of at least 19 percentage points according to three surveys in late February and March: in addition to the Survey Network (LSI) and Alvara Research (discussed in recent Ref Wkly editions), new data has emerged from Saiful Mujani Research and Consulting (SMRC) placing Widodo’s margin over Prabowo at 26 percentage points. A poll conducted simultaneously by Kompas measured the lead at only 12 percentage points – but until other polling corroborates this, it constitutes an outlier that lacks significance. In any event, even if Widodo’s lead has shrunk as much as Kompas claims, he would still enjoy a comfortable cushion (p. 4).
Justice: Religion Minister Lukman Saefuddin is under scrutiny after investigators discovered Rp600 million in cash in his office desk drawer. Meanwhile, former PPP Chair Romahurmuziy failed to appear for questioning as a suspect (p. 7).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Policy News: Public officials clamored for a long-awaited Bill on Protecting Personal Data (RUU PDP) (p. 8). Energy Minister Ignatius Jonan welcomed a parliamentary suggestion to subsidize the higher-octane petroleum product Pertamax, rather than Premium – but he remained noncommittal about implementation (p. 9).
Infrastructure: Jakarta’s governor rejected suggestions from provincial legislators that the MRT should be free, or at least free for Jakarta residents (p. 10).
International: Policymakers denounced the European Union (EU) for allegedly discriminating against biodiesel from crude palm oil (CPO). The planned Comprehensive Partnership Agreement with Europe (IEU‑Cepa) could be at risk (p. 11).
The broad decline in global bond yields and curve flattening suggest that the market has become more concerned about weak global economic growth.
The fall in yields is at odds with the rise in equity and commodity prices this year, but the later may have lost upward momentum.
Safe haven currencies, gold and JPY, have strengthened this week and are likely to perform well if yields remain low.
US real yields have fallen more than nominal yields this year, with a partial recovery in inflation expectations from their fall in Q4 last year. Lower real yields point to weaker fundamental support for the USD, and further support safe havens like gold.
Canadian real long term yields have fallen more abruptly than in the USA, into negative territory, suggesting the outlook for the Canadian economy has deteriorated more than most. This may relate to concern over a peaking in the Canadian housing market. The fall in real yields suggests further downside risk for the CAD.
Long term inflation breakevens have fallen in Australia sharply since September last year to now well below the RBA’s 2.5% inflation target.
Australian leading indicators of the labour market have turned lower, albeit from solid levels, and may be enough, combined with broader evidence of weaker growth, for the RBA to announce an easing bias as soon as April.
Asian trade data and flash PMI data for major countries point to ongoing and significant weakness in global trade.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Bank Tabungan Negara Persero (BBTN IJ) appears to have a nasty combination of high Special Mention Loans (SMLs) and elevated “past due but unimpaired Loans”.
The implication is that provisioning levels are insufficient in an environment of eroding asset quality.
But the bank continues to grow credit by around 20% YoY.
The bank is hugely exposed to the retail real estate market (91% of Loans).
In fact, the Indonesian Banking Sector is rife with high SMLs and in some cases elevated “past due but unimpaired Loans”.
SMLs are traditionally associated with Chinese under-reporting of underlying bad loans, and hence the production of a somewhat flattering Asset Quality picture.
Maybe, the health and valuation of the Indonesian Banking Sector needs to be reassessed with implications for IDR.
NextDecade Corp (NEXT US) recently announced that it started offering long-term contracts indexed to the crude Brent in order to attract more LNG buyers. This follows the agreement reached by Tellurian Inc (TELL US) with Vitol back in December to index a long term contract with the Asian LNG price benchmark JKM. While typically US LNG projects are indexed to the Henry Hub, declining crude oil and LNG prices seem to have diminished the appeal of the Henry Hub pricing compared to the oil indexation. This insight takes a look at the latest trends in the LNG markets to assess which companies are taking the lead in the race to bring to FID in 2019 their proposed LNG projects.
Exhibit 1: NextDecade adds Brent indexation to its commercial offering
Source: NextDecade Corporate Presentation February 2019
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