Bumi Serpong (BSDE IJ) - CLSA Indo

Hermanwan Wijaya (Director) and Andreas Oen (IR Manager)

All the presentations given by property development companies at the CLSA ASEAN Forum have been very bullish, and Bumi Serpong was no exception. The story itself is very straight forward, with the company being one of the largest city developers in Indonesia, focusing on the development of BSD City as a Township in southwest Jakarta. The demand for townships is driven by the overwhelming mismatch in affordable accommodation Indonesia, with 200k in annual completions not nearly meeting household formation growth of 2.5M pa.

Management is not worried about rising interest rates in Indonesia, and perhaps rightly so given that interest rates are being lifted in 25bp increments, and the rate of inflation could be double-digit by the end of this year (CLSA forecast 12.5%). Whilst real rates remain this high, the outlook for property demand in Indonesia remains strong, and similarly, they are not expecting any pick-up in customer defaults (which is already at negligible levels). 50% of their customers use mortgages, 30% use financing provided by the company, and the remaining 20% pay cash.
The company locks in about a year’s worth of materials for construction, so increasing costs are not an issue right now. With property prices rising at 10-15% pa, it also means there is scope to absorb increasing costs. Gross margins on development are around 40-45%
Has significantly de-geared (now net cash). Not because of concerns over rising interest rates, but rather a change in the taxation law which sees them pay tax at the revenue line now, rather than after costs and interest payments. Hence, there is little incentive to carry expensive debt.
Despite earnings upgrades in the last 12 months, the stock has given back significant gains in the last 3 months. Even though the story is solid, so was the valuation, with the forward PE reaching almost 25x in October last year. The stock has sold off since then in line with the broader Indonesian market decline, and now trades closer to 16x. CLSA rates the stock a BUY with a price target of Rp1100