In this briefing:
- Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019
- Indonesia Property – In Search of the End of the Rainbow – Part 3 – Pakuwon Jati (PWON IJ)
- The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce
- Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
1. 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
2. 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.
3. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce
This week’s offering of Insights across ASEAN@Smartkarma is 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.
This week’s highlights include an update from CrossASEAN Insight Provider Kevin O’Rourke on the running order ahead of the upcoming Indonesian Election on 17th April. In the Equity-Bottom-up section, Angus Mackintosh circles back Pt Matahari Department Store (LPPF IJ) post its underwhelming results and we have a number on contrasting views on e-commerce player Sea Ltd (SE US) post the announcement of its recent placement, which was bigger than its IPO from Johannes Salim, CFA, Arun George, and Rickin Thakrar.
Macro Insights
In Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle, Dr. Jim Walker discusses the outlook for Asian Markets in light of a rising profit upcycle.
In Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested, CrossASEAN Insight Provider Kevin O’Rourke analyses the most important political and economic developments over the past week.
In Philippines: February Inflation Eases Back to BSP’s Inflation Target Range, Jun Trinidad comments on the latest inflation numbers out of the Philippines.
Equity Bottom-Up Insights
In Matahari Department Store (LPPF IJ) – A Retail Conundrum, CrossASEAN Insight provider Angus Mackintosh circles back to this beaten up retailer post FY18 results, which represents a retail conundrum.
In PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter, Paul Hollingworth takes a close look at Indonesia’sbiggest micro-lender. Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation.
In OCBC – Difficult to Square, Daniel Tabbush zooms in on this Singapore lender and finds it less than attractive with some conflicting numbers.
In MINT’s First Post-Acquisition Update, our Thai Guru Athaporn Arayasantiparb, CFA circles back to leading Thai hotel operator Minor International (MINT TB) plus updates on Bangkok Dec Con (BKD TB).
In Delta Electronics (DELTA TB): Little Option but to Accept the Tender Offer, Arun George revisits Delta Electronics (2308 TT) and its ongoing takeover situation.
In Sea Ltd Placement – Capitalizing on Momentum, Zhen Zhou, Toh looks at this internet retailer following the announcement of a placement, which is larger than its IPO.
In Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?, Johannes Salim, CFA circles back to Sea Ltd (SE US) following up on his recent Insight on the company.
In Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story, Arun George comments on the recent placement by the company.
In Sea Ltd (SE US): Placing Price Leaves Money on the Table, Arun George revisits the company following confirmation of the price and size of its placement.
In Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?, Rickin Thakrar takes a more negative stance referring to earlier insights from Arun George.
In RHB Bank Placement – A Little Less Surprising but Little Bit Bigger Deal, Sumeet Singh zeros in on the latest placement in RHB Bank Bhd (RHBBANK MK).
In M: Trimmed 2019-20E Earnings Forecast by 12% and 19%, our friends at Country Group revisit Mk Restaurants Group (M TB) post the company’s results.
In Accordia Golf Trust (AGT): Buy but Please Consider This…, Henry Soediarko zeros in on this golf play.
Sector and Thematic Insights
In Thai Telcos Struggle as All Three Seek to Gain Share While Spectrum Risk Looms Again in 2019., our friend at New Street Research revisit the Thai Telecom sector following recent results.
In Vietnam Market Update: Deep Value Found in Salient Themes, Frontiersman Dylan Waller seeks out attractive investment themes in Vietnam.
4. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
- Capital flows are strongly Granger causal
- Gross capital flows lead World shipping activity by 4 months
- Capital flows have been slowly rising since June 2018: in February they jumped
- Reinforces out pro-Asia and pro-China investment message
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