Indonesia Results Review 29 June 2020 Property | Real Estate Pakuwon Jati (PWON IJ) Buy (Maintained) Eyeing a Recovery In 3Q20; Keep BUY Target Price (Return): IDR460 (+8%) Price: IDR424 Market Cap: USD1,436m Avg Daily Turnover (IDR/USD) 55,728m/3.83m BUY, TP unchanged at IDR460, 8% upside with c.5% FY20F yield. Analyst Pakuwon Jati’s 1Q20 revenue of IDR1.6trn is still decent, considering the IFRS 15 adjustments made to revenue recognition from property projects Christopher Andre Benas and COVID-19’s impact on malls since March. Its 1Q20 net profit of +6221 5093 9847 IDR679bn (+2.6% YoY) comprises 29% and 33% of RHB and Street [email protected] estimates. 2Q20 may be its worst quarter this year, but a recovery should be imminent in 3Q20, after its malls begin charging rental on tenants again. Still the king of recurring income. 1Q20 revenue of IDR1.6trn (+3.5% YoY) is above our and Street estimates, at 29.9% and 28.7% of full-year projections. This was due to recurring revenue growing by 1% YoY and development dropping 9% YoY. 54% of PWON’s earnings come from recurring income, with 42.5% driven by retail mall leasing. This remains the Share Performance (%) developer’s highest recurring portion vs peers. Retail mall occupancy rates YTD 1m 3m 6m 12m remained solid at 96%, but revenue per hotel room fell 32% YoY – within Absolute (25.6) 17.1 36.8 (26.3) (41.9) expectations, as the Government imposed travel restrictions, and there was Relative (3.4) 11.1 23.8 (3.9) (19.6) a dearth of tourists in the quarter. 2Q20 revenue should be its lowest this year, as retail malls were hard hit by 2-3 months of deferred rental, and 52-wk Price low/high (IDR) 268 – 745 occupancy rates in malls on a decline. However, we expect a gradual recovery in 3Q20. Pakuwon Jati Tbk (PWON IJ) Price Close Relative to Jakarta Composite Index (RHS) Slight increase in margin. During 1Q20, PWON recorded a GPM of 60%, 820 107 vs 58% in 1Q19. The margin growth came from its real estate segment (at 720 100 68%, vs 61% in 1Q19). GPM of its shopping centre and service apartments segment narrowed by 1%, from 58% in 1Q19. Its hospitality GPM shrank to 620 94 23% vs 34% in 1Q19, due to the low number of tourists. Further down 520 87 however, PWON booked a FX loss of IDR557bn on debt exposure, as the USD strengthened by 17.8% in 1Q20. Although this was unrealised, if 420 80 included, earnings dropped to a mere IDR67bn. Excluding that, net margin 320 74 was decent at 41%, vs 38% in 1Q19. 220 67 Still booking marketing sales, but launches are few. 1Q20 presales Jul-19 Apr-20 Oct-19 Oct-19 Apr-20 Jun-19 Jan-20 Jun-20 Feb-20 Feb-20 Mar-20 Mar-20 Nov-19 Nov-19 Dec-19 Dec-19 Sep-19 Aug-19 Aug-19 Sep-19 May-20 grew to IDR365bn, despite sentiment dampening from the COVID-19 May-20 pandemic. Presales mostly stem from condominium projects in Pakuwon Source: Bloomberg City and Pakuwon Mall, with 84.5% and 86.3% of total area sold. As for office towers, Kota Kasablanka is 16%-sold (construction is at the finishing stage), while Tunjungan City and Pakuwon Center are 96%- and 54%-sold. Debts repaid. As of 1Q20 PWON has repaid its IDR390bn long-term loans and aims to fully redeem its matured loans. The company has steadily deleveraged borrowings over the years. As of 1Q20, its NDER was at 4%, and net debts-to-assets ratio was at 3. In the same financial period, it also had cash equivalents amounting to IDR4.3trn. PWON remains our top sector pick, on the expected recovery in recurring income and its solid balance sheet. Its valuation remains undemanding, at a 62% discount to NAV (albeit at a premium to the peer average). Forecasts and Valuation Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Total turnover (IDRb) 7,081 7,202 5,515 6,587 7,048 Recurring net profit (IDRb) 3,107 2,951 2,370 3,065 3,464 Recurring net profit growth (%) 30.2 (5.0) (19.7) 29.3 13.0 Recurring EPS (IDR) 64.50 61.27 49.22 63.65 71.93 DPS (IDR) 10.89 9.66 19.11 6.00 7.92 Recurring P/E (x) 6.57 6.92 8.62 6.66 5.89 P/B (x) 1.62 1.36 1.23 1.08 0.95 Dividend Yield (%) 2.6 2.3 4.5 1.4 1.9 Return on average equity (%) 22.2 19.7 12.7 14.8 14.9 InterestNet debt cover to equity (x) (%) 12.65 3.1 net 15.17 cash net cash9.67 net 13.64 cash net 16.92 cash Source: Company data, RHB See important disclosures at the end of this report 1 Pakuwon Jati Indonesia Results Review 29 June 2020 Property | Real Estate Financial Exhibits Asia Financial summary (IDR) Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Indonesia Recurring EPS 64.50 61.27 49.22 63.65 71.93 Property EPS 52.80 56.47 41.71 54.60 62.61 Pakuwon Jati DPS 10.89 9.66 19.11 6.00 7.92 PWON IJ BVPS 261.55 310.87 345.06 393.23 447.42 Buy Return on average equity (%) 22.2 19.7 12.7 14.8 14.9 Return on average assets (%) 10.5 10.6 7.6 9.2 9.5 Valuation basis In our SOP valuation, we use DCF to value PWON’s Valuation metrics Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F recurring income, and RNAV to value its property Recurring P/E (x) 6.57 6.92 8.62 6.66 5.89 projects. Our TP of IDR460 reflects a 58% discount to P/B (x) 1.6 1.4 1.2 1.1 0.9 NAV (IDR1,089/share). Dividend Yield (%) 2.6 2.3 4.5 1.4 1.9 Key drivers EV/EBITDA (x) 3.49 3.25 2.99 2.24 1.43 i. Opening of new retail malls and other property projects; Income statement (IDRb) Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F ii. Launching of products to drive marketing sales; Total turnover 7,081 7,202 5,515 6,587 7,048 iii. Favourable tax incentives and policy rates. Gross profit 4,050 4,058 3,097 3,913 4,354 EBITDA 3,539 3,639 3,218 3,634 4,099 Depreciation and amortisation (80) (188) (581) (271) (333) Key risks Operating profit 3,459 3,451 2,636 3,363 3,765 i. Weakening of the IDR; ii. Unfavourable policy rate; Net interest (36) 53 8 34 58 iii. Delay in construction progress leading to lower Pre-tax profit 2,854 3,271 2,276 2,953 3,365 revenue recognition. Taxation (27) (31) (46) (59) (67) Reported net profit 2,543 2,720 2,009 2,630 3,015 Recurring net profit 3,107 2,951 2,370 3,065 3,464 Company Profile Established in 1989, Pakuwon Jati is a diversified real Cash flow (IDRb) Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F estate developer with a focus in the Jakarta and Surabaya areas. The company's portfolio includes Change in w orking capital (798) (1,030) 371 (398) (20) retail, residential, commercial and hospitality projects. It Cash flow from operations 2,071 1,868 3,831 3,229 3,816 is the pioneer of the superblock concept in Indonesia – Capex (905) (811) (1,071) (1,071) (1,071) a large-scale integrated mixed-use development of Cash flow from investing activities (905) (811) (1,071) (1,071) (1,071) retail shopping malls, offices, condominiums, and Dividends paid (290) (289) (420) (310) (406) hotels. Cash flow from financing activities (112) (1,204) (687) (248) (357) Cash at beginning of period 3,406 4,460 4,313 6,385 8,294 Net change in cash 1,054 (147) 2,072 1,909 2,388 Ending balance cash 4,460 4,313 6,385 8,294 10,682 Balance sheet (IDRb) Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Total cash and equivalents 4,460 4,313 6,385 8,294 10,682 Tangible fixed assets 4,111 4,911 4,587 5,138 5,457 Total investments 11,263 11,303 11,548 11,858 12,063 Total other assets 172 238 183 218 233 Total assets 25,018 26,095 27,109 30,159 33,221 Total long-term debt 4,934 3,885 3,777 4,194 4,194 Total liabilities 9,706 8,000 7,148 7,533 7,702 Shareholders' equity 12,596 14,971 16,618 18,938 21,547 Minority interests 2,716 3,124 3,343 3,688 3,972 Total equity 15,312 18,096 19,961 22,626 25,519 Total liabilities & equity 25,018 26,095 27,109 30,159 33,221 Key metrics Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Revenue grow th (%) 23.2 1.7 (23.4) 19.4 7.0 Recurring net profit grow th (%) 30.2 (5.0) (19.7) 29.3 13.0 Recurrent EPS grow th (%) 30.2 (5.0) (19.7) 29.3 13.0 Gross margin (%) 57.2 56.3 56.2 59.4 61.8 Recurring net profit margin (%) 43.9 41.0 43.0 46.5 49.2 Dividend payout ratio (%) 20.6 17.1 45.8 11.0 12.6 Source: Company data, RHB See important disclosures at the end of this report 2 Pakuwon Jati Indonesia Results Review 29 June 2020 Property | Real Estate Figure 1: PWON’s 1Q19 results Results (IDRbn) 1Q19 4Q19 1Q20 QoQ YoY % RHB % Cons Sales 1,711 1,962 1,651 -15.9% -3.5% 29.9% 28.7% COGS (724) (972) (673) -30.7% -7.0% -27.9% -27.4% Gross profit 987 1,020 977 -4.2% -1.0% 31.5% 29.6% Operating expenses (123) (184) (129) -29.8% 5.0% -28.1% -30.3% Operating profit 864 836 848 1.5% -1.8% 32.2% 29.5% EBITDA 993 999 979 -2.0% -1.4% 30.4% 32.7% Pre-tax profit 859 3,271 134 -95.9% -84.5% 5.9% 5.2% Net profit 662 446 679 52.3% 2.6% 28.6% 32.9% Net profit (FX loss included) 721 569 67 -88.3% -90.7% 2.8% 3.2% Gross margin 57.7% 52.0% 59.2% Opex to sales -7.2% -9.4% -7.8% Operating margin 50.5% 42.6% 51.4% EBITDA margin 58.0% 50.9% 59.3% Net margin 38.7% 22.7% 41.1% Source: Company data, RHB Figure 2: PWON’s 1Q20 results by segment (IDRbn) 1Q19 1Q20 YoY Contribution Retail Leasing 678 702 4% 43% Hotel and Serviced Apartments 140 129 -8% 8% Office Leasing 68 68 -1.1% 4% Total Recurring Portion 886 898 1.3% 54% Landed House 166 408 146% 25% Condo Sales 621 310 -50% 19% Office Sales 38 35 -7.9% 2% Total Development Property 825 753 -8.7% 46% Total Revenue 1,711 1,651 -3.5% 100% Gross Profit Office, Shopping Centre and Service Apartments 443 449 1.4% 46% Real Estate 504 508 0.9% 52% Hospitality 41 25 -38% 3% Total Gross Profit 987 983 -0.5% 100% GPM Office, Shopping Centre and Service Apartments 58% 57% Real Estate 61% 68% Hospitality 34% 23% Total Gross Profit Margin 58% 60% Source: Company data, RHB See important disclosures at the end of this report 3 Pakuwon Jati