UOB Kay Hian - B A K R I E L A N D D E V E L O P M E N T Keeping Its Eyes On The Prize

Well-positioned to benefit from a pick-up in property sales in 2H09. We believe the low interest rate and eagerness of banks to be more aggressive in mortgage lending will spur growth in the property market starting 2H09. As of Jun 09, the central bank has cut the SBI reference rate by 250bp from its peak to 7%. Thus, we expect the lending rate to follow suit.

Mortgage rate is currently being offered at 12-13% p.a., down from 15-16% at end-08. Unlocking the property value. We estimate revenue growth of 27% and 44% respectively for Bakrieland (BLD) in FY09-10, mainly driven by the completion of Bakrie Tower, Lifestyle Centre, Pullman Legian Bali and the toll road projects. BLD is currently considering an option to divest or list its stake in the toll road projects. The Group also plans to sell 30% of its stake in the Jakarta Central Business District (CBD) assets to raise cash.

Ripple effect from toll road arm. We like BLD's synergy with its toll road subsidiary as it has proven its capability to deliver the project efficiently. The toll roads also provide recurring revenue to BLD, acting as a buffer to the property sector's downturn. Kanci-Pejagan, the first toll road project for Bakrie Toll Road, will commence operation by Sep 09.

We estimate it will contribute 4% and 12% respectively to its FY09-10 revenue, and 18% to our FY09 RNAV. Strategic partner to strengthen corporate governance. The involvement of US-based asset management company Avenue Capital Group (ACG) by holding 31% stake in BLD should mitigate its corporate governance risk. BLD has also divested 30% of its stake in Rasuna Epicentrum to Limitless LLC, which we believe could enhance project management. Limitless LLC, a subsidiary of Dubai World, is a real estate investment company with a global track record.

BLD trades at 54% discount to FY09 RNAV. We initiate coverage on BLD with BUY recommendation. Being the most liquid property stock, BLD is an attractive play on the expected pick-up in the property market. Our valuation is based on revalued net asset value (RNAV) estimate. We arrived at RNAV of Rp689 and then apply a 36% discount to obtain our target price of Rp440 (+40% upside to the current price).