RHB Indonesia Morning Cuppa - 23 November 2016 - (Property)

Good morning,

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’s earnings and a c.3% decline/increase to Lippo Karawaci’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 IJ, BUY, TP: IDR2,650). 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)

Link to report: to be sent out later

Link to Daily report: Indonesia Morning Cuppa - 231116