Bumi Serpong Damai to boost sales of commercial segment
Bumi Serpong Damai ($BSDE) increase revenue target of commercial segment by 71% through the launching of three apartment and office building projects including The Element in Rasuna Epicentrum area, South Jakarta, South Gate Tanjung Barat, South Jakarta as well as an mixed used project that consists of office building an AEON Mall. The company targets pre-sales of commercial projects could contribute around IDR2.85trn of total pre-sales target amounted to IDR7.22trn for 2017. Furthermore, the company allocates capex of IDR3trn -IDR4trn in 2017 that would be used to fund the projects. The company expects its recurring income to grow by 20%-25% in the next five years. (Kontan, Bisnis Indonesia)
Property: Real Estate - Towards a More Positive 2017
The majority of companies we spoke with have expressed more positive views for 2017, as evident in the 34% YoY growth in targeted aggregate marketing sales to IDR31.6trn. This supports our OVERWEIGHT view on the sector for 2017, where the companies’ aggregate presales target is in line with our presales target of IDR31.7trn. Indonesian developers under our coverage booked an aggregate 15% YoY decline in marketing sales in 2016, due to weaker macroeconomic conditions and uncertainties prior to the implementation of the tax amnesty programme.
Indonesia Property
Another Day of Sun
Maintain POSITIVE; Top BUYs: $BSDE, $CTRA, $BEST
Maintain POSITIVE view on Indonesia’s property sector despite disappointing pre-sales in 2016. We’re confident there’s still room for pre-sales to grow in 2017 even though we don’t expect any further interest rate cuts. Factors that support our view are the stable currency and interest rate from rising commodity prices and benign inflation. On aggregate, we are looking at +23% YoY pre-sales growth in FY17, to be mainly driven by low-middle residential segment. We are also positive on industrial estates from tax amnesty inflow and strong inquiries from corporations. Top BUYs: BSDE, CTRA and BEST.
Prefer mass market residential segment
Even with the current interest rate, major banks are still offering competitive single-digit mortgage rates. We believe this is sufficient to support affordability of the mass market residential segment. Full-year impact of LTV relaxation in 2017 will also help to encourage demand for this segment. On the other hand, we are still wary about the middle-high residential and office segments.
Positive outlook for industrial estates
We highlight industrial estates’ notable steady growth in quarterly sales volume in 2016. Several developers mentioned they have been receiving many inquiries from both foreign and domestic corporations which have boosted their confidence on 2017 pre-sales. Domestic corporations have benefitted from their participation in the tax amnesty program, allowing them to invest their assets through industrial land.
Valuation and risks to our view
Sector currently trades at -2SD of the average 1-year forward P/BV and a discount to RNAV. Risks to our positive view on the sector include political risk, uncertainty in global economic outlook, interest rate hike, regulatory risk, currency volatility and inability to increase land banks.
Bumi Serpong Damai ($BSDE), Notes
Bumi Serpong Damai is a township developer with 5,950 ha area. The company is the largest property company in term of market capitalisation, IDR36trn/USD2.6bn. Accroding to Bumi Serpong, its mortgaged buyers increased to 70% of total customers in 2016 (versus 55% in 2012) thanks to lower mortgaged rate. Although increased significantly, mortgaged loan to GDP is still very small, is around 6% of total GDP. By end this week, Bumi Serpong likely to announce figure of FY16F presales number. Notably, Bumi Serpong's 11M16 presales achieved at around 90% of its target, achieved IDR6.2trn (versus IDR6.9trn target in FY16.
Bumi Serpong Damai ($BSDE): Company visit: 2017 outlook
Property: Indonesia
- Uptrend in quarterly marketing sales of c.IDR6.1tn in 2016: Supported by its “price amnesty program” for its BSD City project, BSDE recorded around IDR2tn of marketing sales in 4Q16, cementing an uptrend since 1Q16 (Exhibit 6). The company provided discounts of up to 15% during phase I (Oct–Nov), which resulted in c.IDR1.1tn of pre-sales, while another c.IDR900bn was achieved during phase II (Nov–Dec) given lower discounting. As a result, BSDE expects 2016 marketing sales to reach around IDR6.1tn, or 90% of its full-year original target, in line with our full-year estimate. We expect to see 9% y-y marketing sales growth in 2017, of which 72% of total sales would be derived from the BSD City project. This report marks a transfer of analyst coverage.
- Additional 2017 top-line growth from 2 JV projects: Backed by BSDE’s two recent JVs – the Balaraja toll road and the Mitsubishi Smart Living project – we expect the company to book an additional c.IDR1.8tn of revenue this year. Total land sales value for the Balaraja toll road should be around IDR900bn (50ha area x IDR1.8mn/sqm ASP) for the first 10km out of 30km of total toll-road length. BSDE holds 50% equity in this project, while both Astratel and Kompas control the other 50%. The Mitsubishi project, which consists of landed and shop houses, has total estimated value of c.IDR1.4tn (19ha land area x IDR7.5mn/sqm ASP), of which IDR500bn was booked in 2016 with the remainder to be recorded in 2017.
- New project launches in Jakarta and Surabaya: Apart from BSD City, BSDE is expanding further into regional areas, having launched two apartments in Jakarta: (1) Southgate, located in Tanjung Barat, with starting prices at IDR30mn/sqm; a mixed-use development project with a retail mall, offices, apartments, a hotel and condos for sale; and (2) Aerium, located in Taman Permata Buana, with 1.8ha of land area comprised of a two-tower condominium and several townhouses for sale. This is a JV project with Itochu, a multinational general trading company based in Japan, with BSDE owning a 51% stake. In addition, the company is planning to launch one of six new apartment towers (1,000 units/tower) in Benowo, Surabaya, with starting prices of IDR300mn/unit.
- Benefiting from operation of UNVR’s new office: Unilever Indonesia ($UNVR) is moving its headquarters to BSD Green Office Park in January–February of this year, bringing some 7k workers to the benefit of BSDE’s residential area project in BSD city. As such, we expect the land ASP in BSD City to rise from IDR12mn/sqm at present to IDR13.5mn/sqm in 2017.
BUY with unchanged IDR2,350 TP
Recent market outperformance (Exhibit 4) likely was based on solid pre-sales. We believe this is sustainable due to BSDE’s expansion beyond its property development in BSD City, providing longer-term growth and stability through geographic diversification. We apply a 55% discount to our end-2017F NAV to determine our unchanged IDR2,350 12M TP. Risks: BSD City infrastructure delays and higher high-rise property demand.
Property (Overweight), ‘Tis The Season To Be Jolly About Mortgages
Our ground checks reveal that commercial banks are stopping their promotional mortgage rates. However, as they are aiming for double-digit mortgage growth rates next year, we expect them to re-introduce packages at lower rates as well – since the rates do not yet reflect the latest cut made by BI in Oct. Note that the combination of the relaxation of LTV thresholds and lower mortgage rates following the BI rate cut during 3Q16 resulted in a shifting of consumer preferences back to obtaining financing for properties via a mortgage.
¨ Promo on hold, but... we learnt that some banks are stopping their promotional mortgage packages this month. The current normal mortgage rate has a fixed interest rate of 9.5-10.25% for one year. Bank Central Asia (BCA) ($BBCA) is still offering the lowest mortgage rate with its latest Fix & Cap promotion, ie 7.99% pa fixed interest for the first three years and capped for a further three years at 8.99% pa. This is almost 50bps lower than what was offered in its previous Fix & Cap promotion. However, we believe IND Banks would continue to introduce lower mortgage rates in the future as:
i. Banks are aiming for double-digit growth in their mortgage segments in 2017. BCA and Bank CIMB Niaga ($BNGA) are aiming for 12% and 9-10% mortgage loan growth respectively;
ii. Based on research by rumah123.com, the most important factor in buying properties is the Bank Indonesia (BI) rate. Most buyers still utilise mortgage facilities to purchase properties. This is also reflected in the trend shifting back towards taking a mortgage as a payment method during 3Q16. This is due to a combination of the relaxation of the loan-to-value (LTV) thresholds and lower mortgage rates following BI’s rate cut.
As such, we expect banks to start re-introducing their respective mortgages at lower rates earliest by Jan 2017. Their current mortgage rates do not yet reflect the latest BI rate cut, which was made in October. Note, also, that presales activities in December are more moderate.
¨ Maintain OVERWEIGHT. We keep our OVERWEIGHT rating on the sector, as we expect a better outlook in 2017 as the following factors have already been priced in:
i. All the catalysts that include the tax amnesty;
ii. A potentially lower benchmark interest rate;
iii. The relaxation of the LTV threshold;
iv. The allowance for properties under construction to come under a second mortgage.
The share prices of property counters under our coverage have softened following public protests on 4 Nov that demanded incumbent Jakarta governor Basuki Tjahaja Purnama, commonly known as Ahok, be arrested for blasphemy. Share prices dropped further after the US election was concluded on 9 Nov. On average, share prices have plunged 9% YTD since 4 Nov. These numbers have recovered by 5% on average from their lowest level during the same period. Nonetheless, the sector is currently valued at a 65% discount to RNAV, or around -1.5SD from its 3-year mean of 56%, which looks compelling. (Lydia Suwandi)
Indonesia Strategy: Managing Volatility
We opine that Indonesia’s fundamentals remain pointed towards long-term positives. This is underpinned by BI’s pro-growth policies to propel economic growth, the low inflation environment, continued government focus on infrastructure spending, and the security forces’ exemplary conduct in maintaining stability as political tensions rise. Thus, we expect stronger market direction post the Fed’s anticipated rate hike in December.
¨ Outflows dominate. Worries over a potential US Federal Reserve (Fed) rate increase and weakening IDR have triggered outflows in both the equities and fixed income markets. This is a reversal after months of inflows. Post Donald Trump’s win in the recent US elections, the JCI continues to trade at sub-5,200 level, with outflows recorded at IDR9.6tnin November. Similarly, outflows in the fixed income market have deepened, reaching IDR17trn over the past month, with the 10-year government bond continuing to escalate to 8.3% (August: +6.3%). Arguably, a lack of catalysts in the market have also led to the insipid performances, and we are only expecting stronger market direction post the Fed rate increase that is expected by mid-December.
¨ The three spectres are currency, interest rate trends and politics. As highlighted in our 14 Nov 2016 Currency Woes Dampen Sentiment report, the fundamentals still point towards a resilient IDR. This is underpinned by its high-yield differential vs developed market (DM) economies and peers, relatively high levels of growth among major emerging market (EM) economies, and ongoing reforms. Rising current account deficit (CAD) over the next few years is still manageable, while forex reserve levels also improved to USD115bn.
¨ Action by Bank Indonesia (BI) to intervene in the currency market is plausible to indicate direction. An influx of asset repatriation is also expected towards year-end, which would help the IDR to recuperate to a more favourable level. We opine that BI would maintain its current relaxation bias policy to propel economic growth, especially given the subdued inflationary outlook. As the series of rate cuts have yet to result in a meaningful economic trajectory, it is unlikely that the central bank would take the risk by reversing its current relaxation policy.
¨ Over the past five years, the spread between the BI rate and inflation has averaged 130bps vs the current 145bps spread. This provides room for further relaxation if needed. We expect BI to maintain its current benchmark rate until year-end, and potentially make another 25bps cut in early 2017 to further support economic growth under stable IDR circumstances.
¨ Jakarta Governor Basuki Tjahaja Purnama’s alleged religious defamation has raised the political landscape’s temperature, as seen by the magnitude of the anti-Basuki rally that occurred earlier this month. This upheaval is negatively perceived by investors, especially after >2 years of stable politics. The market is likely to take heed of the next rally and, more importantly, how the Government handles the situation. So far, the security forces have been exemplary in restoring stability. We continue to believe that the Government’s position remains strong. As long as these forces remain united under presidential control, any act that destabilises the country can be brought under control quickly.
¨ Commodity plays and blue chips. We like PP London Sumatra (Lonsum) and United Tractors as commodity plays. Bank Negara Indonesia (BBNI), Astra International, Ciputra Development, Bumi Serpong Damai (BSD), Telekomunikasi Indonesia (Telkom), Indofood Sukses Makmur and Waskita Karya are all stocks with strong fundamentals. (Helmy Kristanto)
Property: Stay The Course
Share prices of property counters under our coverage have fallen 25% YTD (on average) from their highest levels. With catalysts for the sector in place and with limited downside risk, the sector is currently valued at a 63% discount to RNAV, around -1.4SD from its past 3-year mean of 56% – which looks compelling. Maintain OVERWEIGHT on the sector, while we remain bullish on companies with low gearing ratios, healthy operating cash flow and sufficient landbanks.
¨ Policy rate reversal? We believe a reversal of Bank Indonesia’s (BI) policy rate (Figure 1) is unlikely, as:
i. Indonesia’s real interest rate is positive, at+1.4%;
ii. The BI’s benchmark rate has a wide discrepancy vs that of other countries.
Also, as there is greater uncertainty in the global financial markets in the wake of the US election results, we still think BI will slash its key policy rate by another 25bps to support economic growth – and this may happen as early as 1H17. This is on the expectation of moderate inflation, a manageable current account deficit amid external headwinds for the IDR due to the US Fed Funds rate hike.
¨ Currency impact on earnings. We believe currency fluctuations should have no significant impact on property developers’ earnings, as their costs and revenues are denominated in IDR. For companies with large USD debt exposure – such as Lippo Karawaci and Alam Sutera, where 84% and 80% of their debt is USD – forex gain or loss would be realised only when the debt matures. Our sensitivity calculations indicate that every 2% increase/decline in our forex assumption could result in a 9%/6% decline/increase for Alam Sutera (ASRI)’s earnings and a c.3% decline/increase to Lippo Karawaci ($LPKR)’s net profit in FY17 respectively. We think this is not significant, and would be just a paper profit (or loss) in their books – in terms of recording an unrealised forex gain(or loss) – since both companies’ bonds will mature in 2022.
¨ Accelerated recovery in 2017. We still expect the sector’s recovery to accelerate in 2017 vs this year, based on catalysts like the tax amnesty, a potentially lower benchmark interest rate, relaxation of the loan-to-value (LTV) threshold and the allowance for properties under construction to come under a second mortgage. We note the increased presales activities in October and November. YTD, marketing sales on average have hit 63% of ourFY16F presales target, coupled with potential big commercial land lot sales in pipeline which also reached our targets. As for FY17, we expect presales to grow 12% YoY to IDR31.7trn,as developers continue targeting the middle class segments, selling property with prices ranging between IDR1bn and IDR2bn per unit.
¨ OVERWEIGHT. We continue to favour companies with healthy balance sheets and sufficient landbank, as landed houses are still the most popular type of property to buy (Figure 4). Our Top Pick for the sector is Bumi Serpong Damai ($BSDE). The counter is currently trading at a 66% discount to RNAV, supported by huge landbank totalling 4,092ha, a low net gearing level of 0.1x and FY17F earnings growth of 20% YoY.
¨ Risks include economic slowdown leading to declining purchasing power, slower revenue recognition, as well as external factors such as global financial uncertainties that may indirectly or directly influence investor sentiment. (Lydia Suwandi)
Trump victory - the impact on Indonesia
JCI went into considerable correction, down as much as 2.4% during the intraday, following the prospect of Trump’s winning. Selling pressure were visible across sector, with IDR also depreciated 0.9%. Closer to end of trading hour, market slightly improved mainly led by a rebound on commodity counters, with index closed down 1% with IDR relatively flat.
The Trump’s winning undoubtedly creates uncertainty, especially on the execution and direction of what would be the policy under his administrative, on both economy and politic. According to our economist, historical facts imply that a clean sweep tends to be more positive for the US economy in general because of less gridlock. As such, with Republican sweep (Trump President and GOP Congress), fiscal policy, both from higher spending and lower taxes, is likely to be more expansionary over the next four years on average. It is still too early to conclude for any potential downward revision on economic growth at this stage.
One of the main concerns of the Trump administration would be on potential trade protectionist (anti-trade) issue. In regards of Indonesia, the main export products to the US would be textile, rubber product, shoes, electronics and F&B with export to US accounts for 12% of total non oil and gas export. However, the impact the share of export to GDP in Indonesia remains the lowest in the region at 22% (Vs Thailand’s 58%, Malaysia 73% and Singapore 198%), which would provide much-needed shelter under global economy volatility circumstances. Domestic consumption and government-led infrastructure spending continue to serve as the underpinning factors for economic growth improvement and we still expect economy growth at 5.3% in 2017.
Our economist still expect that the Fed is likely to go ahead with its tightening policy bias and raise rate by 25 bps this December. As such, one of the palpable risks would be on currency of which IDR has enjoyed 5% appreciation ytd. Any sudden increase in volatility could risk of escalation of importation of raw material and potential cost overrun in certain infra projects, which undoubtedly will led to inflation and growth risk. In our view, this risk would be contained, especially as: 1. Indonesia rising forex reserve of USD115b and expected to reach USD150b by 2017; 2. Repatriation fund inflow by end of the year; and 3. Record low inflation outlook at sub-4% level.
Acknowledging potential change in global trade and politics, Indonesia with its domestic consumption at the core, remains to offer attractive investment thesis. At this stage, we see no change on Indonesia fundamental investment story, and maintain our constructive view mainly underpin by macro improvement and government-led infrastructure investment. Our top picks in the market mainly comprise of company with strong balance and visible earnings growth and they are: $BBNI, $CTRA, $BSDE, $TLKM, $INDF and $WSKT. To play on the positive rally on the commodity, we like LSIP and UNTR. (Helmy Kristanto)
Escalation in political tension; Macro improvement remains intact
While demonstration arguably has became part of life in Jakarta, last Friday’s demonstration would be one of the largest, reported to gather c. 50,000 people. The action were joined by many Moslem organisations from several regions to protest against Basuki T. Purnama (Ahok) on the allegation of religious defamation. The demonstration was mostly running in peace and calm order, but suddenly escalate into chaos at c.6 pm, the cut off time limit given by police. Couple of police trucks were burned with several casualty was reported on both side. The chaos only occurred in two specific locations, outside the Presidential Palace and one location in North Jakarta, with one Indomaret convenience store was looted. On Sunday, the police mentioned that the perpetrators of chaos in North Jakarta were unrelated to the one in Presidential Palace, and appears to be purely criminal act.
3 key messages from President Jokowi
We were encouraged by the way of the police and army to act quickly to restore the stability with tear gas, water cannon and truncheons, with strict order that rubber bullet was not allowed to be used. The situation was mostly under control past midnight.
Presiden Jokowi held press conference on early Saturday, with 3 key messages: 1. He condemned the chaos and violent demonstration;2. The legal process of Jakarta governor alleged transgressions would be concluded quickly and transparently and 3. Political actors are believed to ride on yesterday's chaos. In our view, the third points would signify escalation of political tension, which would led the government to make stronger intelligence effort and beef up security to prevent the whole situation to heighten. President Jokowi has also delayed his trip to Australia (scheduled: 6-8 Nov) to focus in restoring domestic stability.
Negative pressure is expected but macro improvement is still on tract
JCI has priced in a peaceful rally on Friday, with index closed up +0.6% ( +1.1% from Friday's low). Selling pressure is expected to happen on Monday, especially on the potential higher volatility of IDR.
There is also growing concern in relation to the prospect of asset repatriation under the current tax amnesty scheme. While the repatriation has been reported to the tax office, the physical transfer of that assets are still underway, with deadline by end of December. As such, it is imperative for the government to act quickly to restore confidence.
Despite Friday’s chaos, we see no change on Indonesia fundamental investment story, underpin by macro improvement and government-led infrastructure investment. Our top pick in the market are: $BBNI, $CTRA, $BSDE, $TLKM, $INDF and $WSKT.
Bumi Serpong Damai ($BSDE) adds 141.83ha of land bank
Up to 9M16, $BSDE has increased their land bank with an additional of 141.83ha of land. The company has allocated Rp1.26tn from internal cash for land banking purposes up to 9M16. As of Sep’16, the company has raked in Rp4.1tn of marketing sales or 60% of FY16 marketing sales target and about 63% (Rp2.6tn) of the pocketed marketing sales coming from residential segment.
Bumi Serpong Damai: Leaving No Stone Unturned
BSD indicated that YTD presales have reached 50% of its FY16 target. We believe the remainder should be easily achieved, given that:
1. Property demand has started to pick up;
2. New upcoming launch at Southgate Residence (Tanjung Barat) is targeted to generate presales of IDR248bn;
3. BSD is in negotiations to sell one big commercial land lot by end-2016.
SOP-based TP is lifted to IDR2,650 (from IDR2,540, 27% upside), as we roll over our valuation base year to FY17. Our TP impliesFY16/17F P/Es of18.5/16.2x. BUY call maintained.
¨ YTD presales reached 50% of target. Bumi Serpong Damai (BSD) indicated that YTD presales have reached IDR3.45trn, or 50% of ours/company’s target. Pickup in demand has been seen since July. In fact, BSD achieved presales of IDR320bn during the 10-day Gaikindo Autoshow in August, which was 28% higher than last year when they first set up a booth at the same event.
¨ Demand-side affordability should be supported by recent passing of the tax amnesty bill, low mortgage rate environment, and allowance for off-plan properties for second mortgages. Meanwhile, BSD’s diversified portfolio, which caters to all affordability ranges, and lowered final tax for developers(to 2.5%), should support the achievement of its remaining presales target.
¨ New high-rise launch. BSD will commence launching of its mixed-used superblock in Tanjung Barat, Southgate soon. It will initially launch Southgate Residence – two apartment towers to be built above AEON Mall. The company recently started gauging interest with the collection of refundable booking fees totalling IDR25m. The exact grand launching date has not been disclosed but BSD is targeting to generate presales of IDR248bn from Southgate.
¨ Discounting to narrow. Price range for the units will be between IDR1.2-2.8bn each, equivalent to IDR30m/sqm orat a 30-40% discount to surrounding peer development projects priced at IDR45-50m/sqm. Price discounting should narrow in our view (Figure 2), given that BSD’s project is:
i. Largest superblock area compared to its peers;
ii. Near to commuter lines;
iii. Integrated with the upcoming AEON shopping mall.
¨ Maintain BUY, new TP of IDR2,650. We roll over our valuation base to FY17, leading to our SOP-based TP being lifted to IDR2,650. Other potential catalysts include possible commercial land lots being sold, which will contribute to this year’s presales. No further information has been disclosed as negotiations are still underway. The stock is still trading at a hefty 61% discount to our RNAV estimate of IDR5,310/share. Key risks to our call include lower-than-expected presales, and delays in construction projects. (Lydia Suwandi)
