Brief Indonesia: Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note and more

In this briefing:

1. Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note
2. US Lake Charles LNG Liquefaction Plant Tendering for Contractors: Positive for TechnipFMC
3. Leong Hup Pre-IPO – Hard to Pinpoint What’s Going to Be the Revenue Driver Going Forward
4. The Week that Was in ASEAN@Smartkarma – Thailand’s Election, Philippine Banks, and Data Junkies
5. Indonesia Property – In Search of the End of the Rainbow – Part 5 –  Summarecon Agung (SMRA IJ)

1. Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note

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 to incorporate 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. 

2. US Lake Charles LNG Liquefaction Plant Tendering for Contractors: Positive for TechnipFMC

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.

3. Leong Hup Pre-IPO – Hard to Pinpoint What’s Going to Be the Revenue Driver Going Forward

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.

4. The Week that Was in ASEAN@Smartkarma – Thailand’s Election, Philippine Banks, and Data Junkies

Macro Insights

In Thailand: Elections Are Not Irrelevant; This One Too Pits Faster Growth Vs. Military “Stability”, Cross ASEAN Insight provider Prasenjit K. Basu discusses the implications of the result of Thailand’s election, which will likely see the incumbent Prime Minister retain his position, this times as a democratically elected leader (result covered in the discussion stream). 

In Widodo Lead Intact / VP Debate Lacks Impact / Trade Slows / Permitting Impediment / PPP Chair Arrest, Kevin O’Rourke looks at the most important political and economic developments over the past week and provides his value-added comment. 

In Thailand’s Election – Growth Story Plays Wait and See, Dr. Jim Walker discusses the recent monetary moves by the Bank of Thailand and what the result of the election might mean for growth. 

In Philippines: El Niño’s Comeback – How Bad? , Jun Trinidad looks at the potential impact from the predicted comeback of El Nino in the economy. 

In Asian Credit Monitor: The Pad Thai Election, Warut Promboon looks at the potential impact of the results from the Thai election and the implications for credit in that country. 

Equity Bottom-up Insights

In XL Axiata (EXCL IJ) – The Crown Prince of Data, CrossASEAN Insight Provider Angus Mackintosh circles back to Indonesia’s most direct play on the rising consumption of mobile data, as pricing in that market starts to look more favourable. 

In Golden Agri: El Nino Back on the Front Burner; Bullish Catalyst for GAR, commodities specialist Charles Spencer zeros on the potential positive impact from an impending El Nino.

In Philippine National Bank – The Beginning of Recognition, Daniel Tabbush circles back to this leading but unappreciated Philippines lender, where he sees greater appreciation from investors starting to transpire. 

In Tisco – A Bright Bank in a Dim Rate World, Daniel Tabbush revisit one of his top financial picks in Thailand. 

In SUTL: Puteri Harbor Construction Started Last Week, Membership Sales to Follow, Cash = 84% of MktCap. CrossASEAN Insight Provider Nicolas Van Broekhoven circles back to this small-cap marina play and finds it to be one of the cheapest stocks listed on the SGX. 

In Delta Electronics (DELTA TB): Thoughts on the IFA’s Valuation RangeDelta Electronics Thai (DELTA TB), Arun George circles back to this ongoing tender offer, which he recommends minorities should accept. 

In After You Looks Beyond Thailand For Opportunities, our Thai Guru Athaporn Arayasantiparb, CFA writes on After You Pcl (AU TB) and Amata Corp Public (AMATA TB) following recent meetings with management. The meetings with the two companies whose industries could not have been more different. 

Sector and Thematic Insights

In Thai Telecoms: Slowdown in Mobile Business Continues., our comrades and collaborators at New Street Research circle back to the Thai Telco sector post 4Q18 results. 

In Snippets #21: Bremen, TMB Rights Issue, Thai guru Athaporn Arayasantiparb, CFA highlights five developments/news flows/trends and their potential impact on Thai equities over the past week or so. 

In Phillippine Gaming Tug of War Disguises Vibrant Sector Potential for 2019-2020, gaming specialist Howard J Klein zeros in on the Philippines gaming sector, which currently flies under investor’s radar but has a lot of future potentials, and more especially Bloomberry Resorts (BLOOM PM). 

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). 

5. Indonesia Property – In Search of the End of the Rainbow – Part 5 –  Summarecon Agung (SMRA IJ)

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.