Brief Indonesia: Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ) and more

In this briefing:

1. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)
2. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019
3. Indonesia Property – In Search of the End of the Rainbow – Part 3 – Pakuwon Jati (PWON IJ)

1. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI 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 fourth company that we explore is township developer Alam Sutera Realty (ASRI IJ), which provides an interesting exposure to a mix of landed housing, high-rise and low-rise condominiums through its Alam Sutera Township near Serpong and its Pasir Kemis township 15 km further out on the toll road. 

Given the diminishing area of high-value land bank in Alam Sutera, the company has shifted emphasis towards selling low-rise condominiums and commercial lots for shop houses, which has been a success story. 

Alam Sutera Realty (ASRI IJ) also has a contract with a Chinese developer, China Fortune Land Development (CFLD), to develop a total of 500 ha over a five year period in its Pasir Kamis Township.  This has provided a fillip for the company during a quiet period of marketing sales and will continue to underpin earnings for the next 2 years.

The company stands to benefit from the completion of two new toll-roads, one soon to be completed to the south connecting directly to BSD City and longer term a new toll to Soekarno Hatta Airport to the north.

It will start to utilise new land bank in North Serpong in 2021, which will extend the development potential in the area significantly longer-term. 

Management is optimistic about marketing sales for 2019 and expects growth of +16% versus last year’s number, which already exceeded expectations.

Alam Sutera Realty (ASRI IJ) has less recurrent income than peers at around 10% of total revenue but has the potential to see better contributions from the Garuda Wisnu Kencana Cultural Centre (GWK) in Bali. 

The new regulations on the booking of sales financed by mortgages introduced in August 2018 will benefit Alam Sutera Realty (ASRI IJ) from a cash flow perspective. Given that the company is consistently producing free cash flow, this is also a strong deleveraging story.

One of the biggest risks for the company is its US$ debt, which totals US$480m and is made up of two bonds expiring in 2020 and 2022. 

From a valuation perspective, Alam Sutera Realty (ASRI IJ) looks very interesting, trading on 4.9x FY19E PER, at 0.67x PBV, and at a 71% discount to NAV. On all three measures, at 1 STD below its historical mean. Our target price of IDR600 takes a blended approach, based on the company trading at historical mean on all three measures implies upside of 91% from current levels. Catalysts include better marketing sales from its low-rise developments at its Alam Sutera township and further cluster sales there, a pick-up in sales and pricing at its Pasir Kemis township, a sale of its office inventory at The Tower, a pick up in recurrent income driven by improving tenant mix at GWK. Given that the company has high levels of US$ debt, a stable currency will also benefit the company. A more dovish outlook on interest rates will also be a positive, given a large and rising portion of buyers use a mortgage to buy its properties. 

2. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019

The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.

Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016

3. Indonesia Property – In Search of the End of the Rainbow – Part 3 – Pakuwon Jati (PWON 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 third company that we explore is Pakuwon Jati (PWON IJ), the biggest retail mall operator, and mixed-use high rise and township developer since 1986. PWON has five major projects in the two biggest cities: Jakarta and Surabaya. 

Its recurring income base is the highest in the Indonesian property universe, playing a big role in the company’s solid earnings performance in the past few years of property downturn. However, currency depreciation, stricter mortgage regulations, and falling rental yields curb investors’ appetite for property investments, leading to weak presales in the past three years. Property development revenues are expected to be trending down going forward on lower presales in 2016-2018. Contrary to peers, cashflow generation remains very strong, led by the large recurring income base and thick margin. There is however no plan to increase dividends, but rather reserving the excess cash for future landbank acquisition.  

The weaker presales in 1H19 is widely anticipated, but we fear that there may be some selling pressure on each weak presales announcements, given PWON’s premium valuations and stock outperformance YTD. Nonetheless, potential portfolio inflow to high beta stocks and rising risk appetite for smaller-capped stocks should be beneficial for PWON. Our blended target price of IDR773 per share offers 21% upside.

Summary of this insight:

• PWON currently operates 7 retail malls, 4 office towers for lease, 4 hotels, and 1 serviced apartment as its recurring income base, representing 52% of revenues. Retail mall division is PWON’s single biggest revenue contributor, growing at 16% Cagr over the past 5 years, making up 40% of total revenues and 77% of total recurring incomes. 
• The company sells landed housings, condominiums, and offices in five project locations as its “non-recurring” property development revenues, which account for the remaining 48% of revenues. Condominiums and offices are PWON’s second biggest revenue generator, comprising about 30-40% of sales. PWON has been pushing more landed residential projects to mitigate the impact from slower condominiums and offices market.
• 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. PWON’s landbanks are located in strategic locations, essential to the success of its past projects in Jakarta and Surabaya.
• Presales are more sensitive to investment appetite and rental yield rather than BI rates. Cash and cash installments typically make up 65-85% of total payments, while mortgages comprise a minority 15-35%.

• Slower take up rate on high-rise projects leads to larger funding requirement. Condominiums can take up to four years to complete if it is part of a superblock project, and a big portion of the raw materials for construction has to be secured and paid upfront to lock in prices and ensure availability.  Meanwhile, the presales mortgage disbursement regulation issued in 2014 diminishes cash inflow from mortgage-paying customers. We constructed a cashflow simulation model for a typical condominium tower launch to analyze the monthly cashflow impact from slower take up rate and mortgage regulation changes.
• Pros: The operating cashflow remains positive and strong over the past five years of property downturn, the best among the property developers that we visited. The seven retail malls generate over IDR1tn cash per year in the past three years, enough to sustain company’s working capital and capex requirements. Free cashflow (FCF) is mostly positive with the exception of 2014 and 2015 when PWON had two big acquisitions. Net gearing peaked in 2015 and had slowly decreased over the years.

• Cons: For the first time since 2010, PWON’s advances-to-inventory ratio, which is an indicative figure for the property developers’ working capital, fell below 100%. We are expecting a slow recovery for PWON as its inventory account should continue to grow higher in the short term as the company plans to launch few new condominium towers in Surabaya and a new superblock in Bekasi.

• Cons: Election year to election year, we may see some similarity between the 2014 and 2019’s quarterly presales split. 1Q14 and 2Q14 contributed 36% to total FY14 presales, while 4Q14 contributed a chunky 36%. If we assume the same quarterly split for 2019 presales target, we may potentially see 4-32% 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: PWON share price is performing relatively in line with the JCI over the past year, outperforming its property peers. Its solid earnings and cashflow are rewarded with premium valuations against peers. The discount to net asset value (NAV) and price-to-earnings (PE) ratio are close to +1 standard deviation above the 5-yr historical mean. After a solid 45% bounce off recent lows, the stock is no longer cheap. However, with better interest rate environment and positive regulatory tailwinds, we may see improving activities after the election. Furthermore, potential portfolio inflow to high beta stocks and better sentiment towards the property sector should also benefit PWON. We derive an IDR773 target price per share for PWON, assuming discount to NAV, PB, and PE valuation re-rating to +1 standard deviation above mean.