Indopremier ELTY (BUY - TP 485)

More Aggressive on Toll Business

9M09 Results Fared Below Expectations
Despite improvements QoQ, ELTY’s 9M09 performance fared poorly against our expectations due to weak sales and some project delays, booking only 47% and 50% of our 2009 revenue and net earnings forecasts respectively (past 9M revenues generally achieved 60%-70% of their respective full year revenues). Revenue from sales of land, housing and apartments fell 24% QoQ while revenue from selling office spaces rose 216% QoQ. The recovery in the property market has been sluggish as banks are still slow in lowering their mortgage rates, which still stand at around 11% without taking into account the discounts. Project completion is expected to speed up in the last quarter and further improvements could be seen as liquidity conditions have improved and a number of national banks plan to lower mortgage rates further by 0.5%-1% in November.

Earnings and Valuation Revised Down
To focus on the completion of the 5 projects delivered this year, ELTY has put much of the construction of other projects on hold, delaying the recognition of revenues from the other projects. We have revised our sales and completion targets and assumptions, cutting our FY09/10/11 revenue forecasts by 26%/20%/25%. As a result, by applying WACC of 17%, we derive a new NAV/share of Rp485, 3.4% lower than our previous NAV/share of Rp502. Our new TP represents 70% potential upside and implies 64.2x FY10F PER and 2.1x FY10 PBV.

Aggressive Toll Road Development
After the completion of Kanci-Pejagan by the end of this year, ELTY is considering developing another or two toll roads next year: Pejagan-Pemalang (56 km at Rp2.8tn) toll road and/or Ciawi Sukabumi (54km at Rp4-5tn). ELTY is planning to divest 10%-30% of Bakrie Toll Road (BTR) to a strategic partner in 2010 in order to realize the value of the asset earlier and fund future toll road projects. Based on BTR’s asset value in 2009, 10% stake is worth Rp150-200bn, although the value can increase further at the end of 2010 once the other toll roads have started operations.

Pooling Capital
In 7 October 2009, ELTY obtained US$45mn equity financing loan at 19% for 3 years from Avenue Luxemburg SARL (shareholder of 24.38% stake in ELTY), out of the total US$100mn that Avenue has committed for ELTY. The interest rate is high given the subordinate nature of the loan while the company feels that it justified by the high internal rate of return from toll-road projects at 23-25%. Next year, ELTY is also planning to obtain additional Rp500mn-Rp1tn of loan in order to fund the projects. Given improving liquidity conditions and ELTY’s low gearing position (our estimate of 0.3x in FY09), debt raising should be undemanding.