In this briefing:
- Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)
- When Job ‘Quality’ Prevailed over ‘Headcount’
- Eurobank: Battle-Hardened and Transformation Bound
- Krung Thai Bank: Not as Cheap as It Looks
- Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders
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. When Job ‘Quality’ Prevailed over ‘Headcount’
- A 387k decline in employment didn’t weigh on the jobless rate of 5.2% according to the latest labor survey data. As the labor participation rate declined in 4Q18, roughly 2.1mn of those in the labor pool voluntarily passed up the job search, to ease any employment demand-supply mismatch.
- For those employed particularly in the non-farm, production sectors led by manufacturing and construction, the quality of jobs generated dominated the lack of headcount gains in determining incomes, if not, uplifting purchasing power. If we exclude direct government job creation from the labor stats, we obtain a non-farm, private job creation of 1.1mn (vs 3Q18: -8.6k) up 3.8%YoY. Average weekly work hours were 43.2 versus 40.6 a year-ago suggesting more overtime work. Salaried workers grew by 1.4mn (+5.6%YoY) employed mainly from private establishments. Underemployment fell to 15.6% in the latest job survey vs 18% a year-ago.
- As inflation recedes, the robust non-farm employment and better job quality won’t be compelling for policymakers to rush any form of monetary accommodation. Since the jobs data or GDP prospects are not as vulnerable to sharp downswings due to onshore catalysts, e.g., upbeat public investments, consumption recovery, despite a less-than-encouraging global backdrop, the Central Bank may focus on possible risk of a liquidity crunch and emergence of positive, real interest rates in determining the policy options for monetary accommodation this year.
3. Eurobank: Battle-Hardened and Transformation Bound
Eurobank Ergasias Sa (EUROB GA) FY18 results were satisfactory. The bank is now weaned off ELA, pays a tax rate of 33% for the first time in many years, generates robust deposit inflows, enhancing the liquidity position, and is actively reducing NPEs. Management foresees the current problem loan ratio at 37.1% easing to 16% in 2019 and 9% by 2021. Problem exposures will be slashed by €10bn in 2019 through securitizations, collateral liquidations, sales, recoveries and charge-offs. Recent data show a much more benign situation regarding negative NPE formation. The worst seems to be behind the Greek Banking System, barring some external global or regional event or domestic policy misstep.
The legal framework for banks has improved with the Katseli Law providing lenders with greater protection for recovering mortgage NPE foreclosures in the event of default on restructured loans. The real estate auction system has also been gaining much greater traction.
Eurobank is engaged in a corporate transformation plan in order to unlock value, improve capitalisation, and manage NPEs. The plan revolves around a merger with Grivalia, “Pillar” (€2bn mortgage NPE securitization), “Cairo” (€7.5bn multi-asset securitization), the creation of a loan servicer, and a hive down. The bank will focus on core banking rather than functioning as a distressed real estate asset manager.
The outlook for the Greek economy has improved somewhat. The 2019 Budget is based on a primary surplus target of 3.5% of GDP. Exports and private consumption are drivers for solid growth of around 2%. The cash buffer of at least EUR26.5 bn is equivalent to 2 years of gross financing needs. Moody’s raised Greece’s issuer rating to B1 from B3 and its outlook to stable from positive (Feb19). The sovereign gained market access with recent 5year €2.5bn and 10year €2.5bn issues. A tailwind will be the resurgence of “animal spirits” under a New Democracy administration after elections later this year.
Eurobank trades at a P/Book of 0.4x (European median is 0.8x) and a franchise valuation of 4% (European median of 12%). We believe these valuations are quite attractive in the grand scheme of things, especially given the progress underway on reduction of NPEs, the elimination of ELA, and the deposit inflow position. A caveat remains the reduction in SH Funds and the subsequent increase in Debt/Equity. While the PH Score™ is no more than average, we are encouraged by positive trends regarding asset quality improvement, an expanding NIM, enhanced liquidity, and efficiency gains. This is a fair Score at a compelling valuation- whatever metric you choose to use.
4. Krung Thai Bank: Not as Cheap as It Looks
Originally, Krung Thai Bank Pub (KTB TB) struck us as interesting. A solid PH Score™, reasonable franchise valuation and P/Book, and a low RSI.
However, further due-diligence shows a somewhat stagnant and eroding operation.
- Headline profitability improvement is unrelated to efficiency or to operational advances.
- Cost growth is fast outpacing a declining top-line.
- Interest income has actually fallen for each of the last 3 years.
- The bank is being squeezed on margin despite keeping interest expenses unchanged.
- Non-interest expenses soared by 26% YoY.
- The bottom line (and profitability) was flattered by varied low quality items as well as much lower loan loss provisions, but still remained well above comprehensive income.
- Asset Quality is also concerning (despite lower loan loss provisions) given the sharp rise in loss (especially) and substandard loans as well as the amount of Special Mention Loans on the Balance Sheet. This means provisioning of problem loans may not be sufficient.
- Liquidity: Deposits are also declining, pushing up the LDR.
5. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders
The key point of interest for investors regarding Chiyoda Corp (6366 JP) continues to be details surrounding its upcoming capital raise. The company has, since early November when it incurred these losses, offered scant details regarding the structure of the capital raise, except to note that the components would include additional loans and equity from industrial partners and most likely, main shareholder Mitsubishi Corp (8058 JP).
We visited the company to gather as much information as possible on the potential structure of the capital increase and to update the order outlook and reasons for further cost overruns.
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