CLSA Land Inflation

A unique and good note on Indo property from analyst Sarina Lesmina today. She tracked back independent 3rd party valuation of seven property companies in Indonesia (this represents 80% of the listed property space).

This is not exactly apple to apple comparison (due to limited data available), but the exercise confirms that Indonesian property companies are vehicles to asset reflation. Greater Jakarta’s land value of the companies that we tracked has appreciated by a blended 20% cagr over the past five years.

And in spite of strong operational performance (close to record high marketing sales + good land price appreciation +15% YoY), the property sector is trading around 58% discount to NAV – on the higher side of historic discount (see chart below)

Buying these property stocks is akin to taking a stake in the future value of their landbank. We maintain OWT call on the sector. Bumi Serpong (BSDE IJ) and Summarecon (SMRA IJ) are the top picks in the sector. BSDE is the most leveraged to changes in land price.

Another interesting point we would like to highlight from Sarina’s report today is that property developers with exposure to very popular Serpong area (BSDE, SMRA, ASRI, and LPKR) seem to register higher CAGR. Location does matters!

Extrapolating the NAV appreciation trend three years forward, discount to future NAV for top picks Bumi Serpong (BSDE IJ) and Summarecon (SMRA IJ) will increase from currently around 50% to 70% area.

Key points from the report:
· Property companies are vehicles to asset reflation. Property companies’ NAV changes over time as land prices are re-appraised, the size of land bank changes and new projects were added.
· We tracked seven property companies which represents 80% of the listed property space in Indonesia and discovered that NAV appreciated by 8-26% cagr after each revaluation by third party appraiser
· Compounding this forward offers tremendous leverage to the companies’ NAV and investors. It also implies when land bank is monetized, margin will rise especially for companies with large land bank. Moreover, because land values are rising, hence so is future NAV.
· We are “OVERWEIGHT” the sector, and our top picks are BSDE and SMRA. The sector is currently trading at an attractive 58% discount to its NAV from the seven companies that we tracked.
· Mortgage rate is now at a comfortable low vs historical, however the sector has not narrowed as before. Mortgage credit of the major six lenders in Indonesia grew 23% YoY.
· We like Bumi Serpong (BSDE IJ) as one of our top buys in the space. BSDE is the most leveraged to a change in land price given more than 90% of their assets are related to residential development.
· SMRA is also a strong developer with 11-13% upside to our profit forecasts for FY11/12.