Indonesia Property - In Search of the End of the Rainbow - Part 8 - Bekasi Fajar (BEST 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 eighth company that we explore is Bekasi Fajar Industrial Estate (BEST IJ), an industrial estate operator in the Cikarang, East of Greater Jakarta with an overall estate portfolio of 2,300ha. About 1,250ha is fully developed, leaving BEST with 1,051ha gross landbank (716ha net). BEST's estate is located 30km from Central Jakarta, the closest one to the city center among other integrated industrial estates in the Cikarang Area. The company is also expanding to a new area in West Java, further East of the current estate where the minimum wage is cheaper.

BEST commanded a premium pricing versus its neighbors due to its well-established infrastructure and closer proximity to the city, port, and airport. The company continues to outperform peers in terms of margin as it stays on its core industrial estate business. Despite rising land acquisition cost, BEST benefits from a stronger USD as its land ASPs are pegged to the Dollar. Over 40% IDR depreciation since 2013 has helped BEST to maintain its gross margin at above 70%.

Indonesia is one of the key ASEAN countries that is set to benefit from the US-China trade tension. Import tariffs imposed by the US may not be enough to push the current factories to move outside of China, but the multinational companies may think to relocate their future expansion elsewhere. Our channel checks confirm that inquiries on the industrial estates have also doubled compared to the previous year.

The increased inquiry volume, driven by the domestic investment cycle and US-China trade tension is the next leg for growth in the short term. Over the medium term, growth from the new industrial estate expansion and infrastructure roll out should kick in. BEST is currently trading at 0.6x PBV and 5.5x forward PE, about 1-std below its mean. Our estimated fair value for BEST, using a mean reversion method for the PE and PB valuation, is at IDR398 per share. The fair value is equivalent to about 55% discount to NAV.