CLSA BSDE, bringing in a sibling?

Property analyst Sarina has just written a note on property company Bumi Serpong Damai (BSDE IJ). In particular, Sarina is looking at the possibility of consolidation with Duta Pertiwi (DUTI IJ), a sister company.

There is no detail on timeline and means of the consolidation at the moment.

The combined entity will have a sizeable 4,250ha land bank in Greater Jakarta and Surabaya (the second biggest landbank after Bakrieland). BSDE market cap USD1bn daily vol USD 1.6m, DUTI mkt cap USD 326m daily vol only USD 7k.

Moreover, from operational standpoint, Sarina thinks the consolidation makes sense. DUTI’s reputation as a good commercial developer with strong recurring income (half of their revenues) will compliment BSDE. Both companies also have strong financials, and have enjoyed good margin expansions.

DUTI’s ITC (trade center) has become a trade mark for commercial kiosk development. ITC Mangga Dua in Jakarta is one of the top domestic tourist destinations - for shopping. You can find almost everything there, from DVDs to toys to jewellery at prices you will find hard to beat. In some areas, the selling price for a kiosk can reach Rp100mn (US$11k) psm!

Other key points from the report:
BSDE is still a good proxy for the property sector in Indonesia. It has 3,250ha in West Jakarta, strong balance sheet, and highest margin vs. peers.
Potential upside from margin. Our GP margin assumptions of 50% look conservative v.s. company’s latest achievement of 56% in 1H10. Assuming GP margin of 55% implies another 18% upside to our earnings estimate for 2010 and 14% for 2011. If GP margin reaches 60%, this implies earnings upside of 38% in 2010 and 30% of 2011.
Confident. BSDE is confident that GP margin of at least 50% is attainable through increasing selling price, delivering product mix which targets multi segment, and better cost management.
Investment conclusion. DUTI is now trading at 58% discount to NAV, while BSDE at 47%. At this juncture, as a separate entity, BSDE has larger land bank, bigger market cap, float and higher liquidity.
Valuation. Shareholders can indirectly buy land for the equivalent of US$32psm today, about one-tenth the selling price of land. BSDE trades at 19.4x PE2011, but assuming the higher GP margin, this drops down to 15x with 18% ROE.
Maintain BUY. 47% discount to NAV