APLN complication - JP Morgan

* Agung Podomoro Land (APLN) – a complicated issue indeed. The company held an analyst meeting yesterday after releasing FY10 results. Management expects profits to be at least double in 2011 (at least Rp480bn). We expect net profit of Rp552bn and consensus expects Rp578bn for FY11.

My take – management’s new guidance seems to be on the safe side, taking into account the possibility of APLN borrowing some US$150mn in the event that the company can close an opportunistic land acquisition deal (market speculates the landbank seller to be Bakrieland). Without that, I continue to see upside risk to consensus number, given that 2010 marketing sales have far exceeded JPM estimate (Rp2.4trn vs. Rp1.8trn excluding VAT), and the upbeat 2011 marketing sales guidance of Rp3.5-4.0trn vs. JPM estimate of Rp1.8trn. The company guides normalized gross margin of 35% (slighly lower than JPM estimate of 38%), but the net effect on earnings should still be positive. In theory, a much higher than expected 2010-11 marketing sales should drive substantial upgrade to 2012 net profit. But the complication lies on maithe adoption of new accounting rule for the high-rise developers, where they can no longer book revenue on percentage of completion. So the issue now is that despite the fact that APLN is doing really well, net profit realization for 2011 and 2012 may be an on-going concern for the stock. On a discount to NAV, the stock trades on an 18% discount to last publish NAV/share of Rp415 (assuming no re-investments), versus peer group at 40% discount. *** Perhaps we should look at these property names on a whole different metric – I am suggesting MarketCap-to-Unbooked Profits, which is often used to compare construction companies to account for backlog orders ***