Brief Indonesia: Indonesia Property – In Search of the End of the Rainbow – Part 5 –  Summarecon Agung (SMRA IJ) and more

In this briefing:

1. Indonesia Property – In Search of the End of the Rainbow – Part 5 –  Summarecon Agung (SMRA IJ)
2. Lead Intact, Says Preponderance of Polls / MRT Tariff Undecided / EU Trade Tension / PDP Bill Sought
3. Gold May Rise on Lower Real Ylds; Canada Leads Fall in Real Ylds; Aust Inflation Expectations Slump
4. RRG Weekly – Fed Highlights Headwinds – Greece Greases Growth – Thai Election Sun Too Close to Call
5. Medco’s Bump For Ophir Won’t Sway Petrus

1. 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.

2. Lead Intact, Says Preponderance of Polls / MRT Tariff Undecided / EU Trade Tension / PDP Bill Sought

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).

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).

3. Gold May Rise on Lower Real Ylds; Canada Leads Fall in Real Ylds; Aust Inflation Expectations Slump

• 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.

4. RRG Weekly – Fed Highlights Headwinds – Greece Greases Growth – Thai Election Sun Too Close to Call

• US: Fed Sees Tailwinds from Global Growth Shifting to Headwinds from China and Europe.
• Greece: Growth supported by ‘Golden Visa’ (5-year visa for investing 250,000 Euro) and strong tourism arrivals. 2.3% GDP in 2020.
• Thailand: Sunday election between Shinawatra-linked Pheu Thai Party and military backed Palang Pracharat Party. Too close to call.
• Brazil: Former Brazilian President Michel Temer has been arrested in São Paulo as part of the Car Wash corruption investigation. Brazil stocks fell on the news.

5. Medco’s Bump For Ophir Won’t Sway Petrus

The boards of Medco Energi Internasional T (MEDC IJ) and Ophir Energy (OPHR LN) have agreed to increase the Offer price to £0.575 from £0.55, representing a 73.2% premium to the undisturbed price.

All other details of the scheme remain unchanged. The court meeting is to take place on the 25 March, while the long stop is the 20 June – unless both companies agree to an extension.

On Petrus

Petrus has yet to respond to the Offer increase; however, it would be surprising if its stance against the takeover has altered. 

In its prior letter to Ophir on the 14 January, Petrus recommended selling the South-East Asian (SEA) assets to Medco – excluding the Tanzanian and Mexican investments – with a low-end fair value, before synergies, of £0.64/share, through to £1.42/share on a blue sky basis.

Shortly before the increase, Petrus was quoted (paywalled) it would vote its 3.95% against the takeover, while adding “Our satisfaction with the value our board deems as satisfactory has decreased further“, with reference to the release of Ophir’s full-year results on the 12 March.

On Sand Grove/Coro

Subsequent to the bump, Coro Energy PLC (CORO LN), which had previously submitted a non-binding cash/scrip reverse takeover offer on the 8 March, declared it has no intention to bid.

Sand Grove has also announced it has given an irrevocable undertaking to vote its 18.73% in favour of the scheme. Coro held discussions with Sand Grove before abandoning its bid.

Trading Tight – Upside Less Assured

Medco’s Offer is conditional on 75%+ approval from Ophir’s shareholders, which appears less tenuous following the 4.5% bump and Sand Grove’s irrevocable undertaking. While I consider the offer for Ophir sub-optimal – and shares have closed above terms on 30% of the trading days since Medco’s initial offer – Petrus alone cannot disrupt the vote. Of note, the next three largest shareholders behind Sand Grove have reduced their holdings since end-December 2018.

The gross/annualised spread is tight at 0.7%/2.6%, assuming early-July payment. The risk/reward in punting at or just below terms is now less attractive following this Offer Price increase and the irrevocable undertaking.