PT Summarecon Agung Tbk (SMRA IJ) A Better Future 11 October 2017 INDONESIA | PROPERTY | INITIATION HOLD Company Background MARKET PRICE IDR 1,075 PT Summarecon Agung Tbk (SMRA) and its subsidiaries develop and invest in real estate. The Company develops and operates residential houses, apartments, shopping centers, TARGET PRICE IDR 1,180 (+9.77%) recreational centers and office buildings. COMPANY DATA Investment Merits O/S SHARES (BN) : 14.43 . Low interest rate environment and spatial LTV may spur demand MARKET CAP (IDR TN) : 16.374 MARKET CAP (USDBN) : 1.211 We believe the latest rate cut will be another crucial variable that will affect the 52 - WK HI/LO (IDR) : 970/1,785 performance of the property sector in the medium term. Recent newsflashes have 3M AVG. VOLUME (MN SHARES): 24.47 indicated that several banks are planning to increase their exposure in housing loans by PAR VALUE (IDR) : 100 lowering mortgage rates. On a related note, BI is also planning to issue a macro- MAJOR SHAREHOLDERS, % prudential regulation to boost credit in property and automotive. The policy is the spatial PT SEMAROP AGUNG: 25.43% LTV scale in each different region. We believe any relaxation in mortgage disbursement PT SINARMEGAH JAYASENTOSA: 6.60% scheme is likely to lift pre-sales. APG STICHING STRAT REAL EST POOL: 5.61% . Bandung and Makassar projects are the ones with high potential VANGUARD: 2.78% We are positive on SMRA's plan to launch more low-rise instead of high-rise in FY17E. FIL LIMITED: 1.99% Additionally, upside risks to our rating and price target also include better-than-expected PRICE VS. JCI ASP growth and take up rate from Bandung’s subsequent launches. We are also 130 expecting bright prospect from the Makassar project as ASP may see growth around 7.5% 120 110 over the next 2 years if spatial LTV relaxation is to be implemented in this region and 100 infrastructure projects experience no further delay. 90 80 . Vast land bank and strong project pipeline justify attractive valuation 70 SMRA has a very strong project lineup in its pipeline, which includes a total estimated 60 50 project value of IDR 3.3 tn in Kelapa Gading, over IDR 13.87 tn in Serpong and over IDR 40 48.04 tn in Bekasi. With this in mind, we expect SMRA's pre-sales to witness a 13.2% 17 16 17 16 17 17 17 - - - - - - - Jul CAGR 2017/20E, with majority of contribution coming from Bekasi and Serpong. Jan Sep Sep Nov Mar Furthermore, valuations are inexpensive, with the stock currently trading at a 60.4% May JCI Rebased SMRA discount to RNAV and below the one year historical mean. Source: PSI Research, Bloomberg Key Risks . Debt burden continues to mount KEY FINANCIALS Net gearing was hovering around 41% to 66% in 2014-16 and we forecast it will stay IDR bn FY17F FY18F FY19F FY20F around 57% as the company will likely start to deleverage after 2020 when the revenue backlog has cleared out in 2019. We are, to some extent, cautious by this level of net Revenue 3,101 3,942 4,802 5,442 gearing as it is above the ideal level and SMRA has continued its lengthy cash installment EBITDA 1,872 1,977 2,086 2,464 period which has affected its net leverage. In our view, this is an approach that SMRA has Net Profit 594 591 631 871 to take in order to stay competitive. In addition, its bottom line will be helped by higher EPS, IDR 41.19 40.97 43.74 60.40 margin from portfolio mix change as SMRA will focus more on residential property PER, x 28.65 28.80 26.98 19.54 development rather than apartments. P/BV, x 1.93 1.79 1.66 1.52 . Macro condition and political risk ROE, % 6.8% 6.2% 6.2% 7.8% Another downside risk to our thesis is that the SMRA’s pre-sales could fall below our Net Gearing, % 69 62 48 57 forecast either due to weak macro conditions or adverse political tension. Property pre- sales historically have been weaker pre-major elections and the pick-up on pre-sales Source: PSI Research typically started to occur around three quarters post-major elections. There is also a possibility of property price outlook may negatively affected if infrastructure execution decelerates. Initiate with HOLD We believe SMRA is currently trading at a discount (62.2% discount to RNAV above its 3 years historical mean of 58.7%), thus we commence our coverage on SMRA with HOLD Valuation Method: Sum of the parts (SOTP) rating and 12 month forward target price of IDR 1,180 per share using SOTP valuation Yehuda Anthony Harahap (+62 57900800) method which implies 1.93x PBV ratios FY17E, P/E ratio FY17E of 28.65x and ROE FY17E of [email protected] 6.8%. The valuation method is based under assumption of risk free rate of 6.82% and terminal growth rate of 4.5%. Page | 1 | PHILLIP SEKURITAS INDONESIA SUMMARECON AGUNG INITIATION Investment thesis We have positive view on SMRA’s strong project lineup in its pipeline, which includes a total estimated project value of over IDR 3.3 tn in Kelapa Gading, over IDR 13.87 tn in Serpong and over IDR 48.04 tn in Bekasi for the longer term. Coupled with our expectations for an improving macro environment and renewed confidence in 2018, we expect SMRA's pre- sales to witness a CAGR of 13.2% over 2017/20E with majority of contribution coming from Bekasi and Serpong. Another key differentiator is that, in FY19F, we estimate Makassar and Bandung projects will contribute as much as 19.63% of total marketing sales, rising from 15.12% in FY17F. Our assumption is based on surging ASP growth and demand expansion in Bandung and Makassar given their exposure to several high-profile infrastructure projects which should be completed by early 2019. In addition to strong project pipeline, SMRA is known for its success in developing retail spaces. The company’s Kelapa Gading Mall, Summarecon Bekasi Mall and Summarecon Serpong Mall, have been successful in attracting patrons and enjoyed an average occupancy rate higher than 94%. It is also noteworthy that 48.67% of their major tenants have lease expiry in more than 3 years which should help prevent occupancy rate deterioration. While its ability to generate recurring income is notable, around 59.4% of revenues remain contributed by property development. Thus far, the company had achieved 9M17 marketing sales of IDR 1.99 tn, this target completed 56.8% of the revised FY17 pre-sales target at IDR 3.5 tn. In order to achieve another IDR 1.6 tn of pre-sales shortage, for the next three months, SMRA plans to hold five more project launching, with the first being the Burgundy Residence at Orchard 2 Residential, Bekasi. It offers 391 units (66 sqm-104 sqm) cluster house, costing from IDR 1.1 bn-1.9 bn. With this in mind, we are fairly cautious on its property sales due to SMRA’s considerable exposure toward mid to mid-high end products as property buyers’ liquidity as well as buying power have not recovered to the ideal level since 2014. Nevertheless, we are upbeat on SMRA’s recent shift in strategy from high-rise focus to low-rise centric. This move will offer SMRA with a much needed higher margin and smoother revenue recognition. Hence, we initiate our coverage on SMRA with HOLD rating and 12 month forward price target of IDR 1,180 per share using SOTP (see RNAV summary) valuation method which implies 58.5% discount to RNAV. Our RNAV calculation uses DCF method to value investment properties, which applies terminal growth of 4.5%, risk free rate of 6.82% and WACC of 15.4%. Spatial LTV relaxation to spur demand Since 2016, regulations have been aimed to push property sector back to its best but their impacts on the market remained limited. Loan-to-value (LTV) relaxation, lower final tax to property sellers (PPh tariff cut from 5% to 2.5%) and relaxation of foreign property ownership have not been enough to boost property sales (Figure 1). Figure 1: Mortgage Growth vs. Pre-sales 400 25% 300 5% 200 -15% 100 0 -35% 2012 2013 2014 2015 2016 8M17 Mortgage (LHS) BI Rate* (RHS) Mortgage Growth (RHS) SMRA's Pre-sales YoY (RHS) Source: Bank Indonesia, Ministry of Finance, PSI Research Page | 2 | PHILLIP SEKURITAS INDONESIA SUMMARECON AGUNG INITIATION BI is planning to issue a macro-prudential regulation to boost credit channeling in property and automotive sector. BI governor, Agus Martowardojo, mentioned that LTV spatial policy easing plan will be based on the conditions of the development of property and automotive industries in each region. He also ensured that the LTV spatial policy will be issued no later than 2017 in order to reduce the lag between policy implementation and market’s reaction. However, mortgage LTV regulation has been revised 3 times since 2013 and the two relaxations in 2015 and 2016 were not sufficient to lift pre-sales. In our view, another relaxation in mortgage disbursement scheme is likely to lift pre-sales especially in several regions with growing buying power such as Makassar and Medan but mortgage disbursement introduced may take time before developers’ balance sheet and working capital can normalize. We have composed a scenario (Figure 2) with possible adjustments made to the current LTV caps. Each region will have different ratio depending on its purchasing power and economic growth.