BEST: Priced to woo - YU

One of the most established and best-known industrial-estate developers intends to raise Rp300bn in an IPO to boost its land bank, in time to cater to surging demand from foreign and domestic investments. Priced below 5x P/E and some 80% discount to RNAV, it has been priced to win on listing. Proceeds are likely to go towards land-bank expansion, from its existing 816 ha.

Best of the lot
Located 25km along the Bekasi toll road to the east of Jakarta where there is a cluster of industrial estates, BFIE’s estates are closest to Jakarta’s CBD (45km), its seaport (35km to the north) and airport (45km), among peers. Things could get even better when a new toll road, JORR2, next to its site, is completed (slated for 2015/16). The toll road would cut the distance to a new seaport to 20km. Branded as MM2100, this is one of the most established industrial estates, currently housing 320 tenants, including many well-known MNCs. With a net saleable land bank of 580Ha, BFIE is one of the few developers that can provide large land plots to anyone who wants this.

Plenty of growth in the pipeline
Industrial estates, which surfaced on the radar in late 2010, enjoyed strong marketing sales in 2011, allowing for price increases of 54% on average. The momentum has not waned, with prices moving up by another 25% YTD. BFIE’s earnings are projected to grow by 100% CAGR over the next three years on 50% sales growth, estimates the company.

Valuations to die for
Its IPO structure includes one free warrant for every two shares at a strike price of Rp200. At its IPO price, it is valued at under 5x CY12 P/E, 13x on a trailing basis and about a 73% discount to RNAV. If its valuations catch up with peers, its stock price may surge to Rp230-400. Arguably, BFIE may fetch a premium given its location, sizeable land bank and better balance sheet. It has been priced to do very well on listing day. Lesser known is how it would be consolidated with sister company, ASRI, if this ever happens.

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Property Sector: Demand still strong - DP

* Property stocks continue to outperform
* Demand still has not slowed yet
* Transaction reporting still uncertain
* Prefer laggard: BSDE

Property continues to outperform.
Since mid March, JAKPROP has gained 8.5%, outperforming 3% gain in JCI in the same period. Main drivers of the sector are large listed developers, with some recording double-digit gains in the past few weeks. Summarecon was the top gainer in the past three weeks (+20%) followed by Lippo Karawaci (+14%) and Bumi Serpong (+10%). Alam Sutera and Ciputra were lagging the sector but have outperformed on YTD basis.

Demand has not slowed yet.
Despite concerns over fuel price hike and loan to value limit, property demand has not slowed based on our preliminary checks. Take-up rates for recently launched Summarecon’s shophouses in Bekasi have been good and several developers look set to achieve their presales targets of 15% this year, based on the preliminary figures in January and February. Moreover, property companies are still keeping their launch dates intact for this year.

Transaction reporting not yet fully implemented.
The regulation that requires property companies to report transactions above Rp500m to PPATK (Financial Transaction Report and Analysis Center) by March 2012 has not been  implemented yet. It remains to be seen how the regulation will be implemented, as >50% of property buyers prefer to pay cash or installment but so far there has not been any issue. Listed developers disagree with this new regulation as it means all their transactions must be reported.

Prefer BSDE.
Current valuation at less than 10% discount to companies’ NAV seems expensive. However, some companies may see the discount widen to 30% upon revised RNAVs. We prefer laggard Bumi Serpong (BSDE IJ) as the company is undergoing appraisal like SMRA and ASRI.

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HRUM: Concern over limited reserves - ZP

Results could have been better.
Harum Energi booked FY11 net profit of Rp1.46t, up 78% YoY but 5% below our expectations. Higher-thanexpected operating expenses were responsible for the shortfall, mostly because of surging salaries (+93% YoY) and a five-fold increase in taxes and licensing charges. Sub-par performance by Harum’s non-consolidated subsidiary, Santan Batubara (SB), also contributed to the earnings miss.

Mixed result from operating coal assets.
Mahakam Sumber Jaya (MSJ) production volume surged 51% YoY to 8.0m tonnes while that of SB fell 19% YoY to 1.7m tonnes, below the 2.0m-tonne target set by Harum. Stripping ratio (SR) at SB also spiked to 12.0x (from 9.3x), resulting in 24% YoY decline in net profit to US$23m. Development of new mines is crucial. Harum commenced production at Block E of MSJ in 2010 and we expect production from the block to overtake that of Block D in 2012 as the former holds more reserves. As coal from Block E has a much higher sulfur content than coal in Block D, the company will have to blend the coals to meet customer requirements. The timely development of Tambang Batubara Harum (TBH) is crucial to avoid having to buy low-sulfur coal from third parties at elevated prices.

Exploration needed to increase reserves.
By industry standards, Harum’s reserve count is low at ~106m as of end-2011, barely enough to support production at the current rate for the next 10 years. We will pay close attention on the outcome of Harum’s exploration work at Uskap Block at SB, which will be announced in 2Q12.

Downgrade to HOLD on limited reserves.
We employ a DCF valuation based on life of mines, assuming that the company can economically mine its measured resources on top of existing reserves, to derive our TP of Rp8,750/share, at which the stock would be trading at a 2012F PER of 14.8x. As a sanity check, assigning a US$20/tonne value for its existing reserves or around 60% of its current cash margin spread yields a fair value of Rp7,700/share. As such, we downgrade our recommendation to HOLD.

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CMNP: Embarking on organic growth - ZP

Higher-than-expected earnings on lower tax rate.
Citra Marga Nusaphala Persada (CMNP) reported FY11 earnings of Rp357b (+19.8% YoY), much higher than our and consensus forecasts. We believe this was due to a lower realised tax rate of 9% as opposed to the regular rate of 23%, which we used in our forecast. Based on a tax rate of 23%, CMNP’s FY11 earnings would stand at Rp302b, in line with our estimate. Traffic volume growth of 5.1% YoY and the minimal impact of the FY10 tariff hike for the Waru-Juanda toll route saw operating profit inched up 6.6% YoY to Rp422b, in line with our estimate but slightly below the Street’s. It should be noted that wages and toll road maintenance resulted in higher operating costs in 4Q.

Full impact of 2011 tariff hike yet to unfold.
For 2012, we maintain our estimate of 4.4% YoY growth in traffic volume for the Jakarta Intra Urban Toll Road (JIUT). The 10% tariff increase for JIUT in 4Q11 should underpin revenue growth of 10.7% YoY in 2012. Tariff revisions for JIUT tend to have a greater impact on revenue because it contributes more than 93% to total revenue versus just 7% from the Waru-Juanda toll route. We believe the full impact of the JIUT tariff hike would be reflected in CMNP’s 1Q12 operating performance, which would see FY12 margin expanding to 55% from 53% last year.

Organic expansion a priority; retain BUY with Rp2,500.
While the biannual tariff adjustments and stable traffic growth would continue to provide a steady stream of revenue for CMNP this year, we believe that it is also a crucial year for new projects to deliver on organic growth. The company’s forthcoming Rp1.5t bond issuance should be seen as a precursor to secure organic expansion. Aside from the development of the Depok-Antasari new project, we expect new routes to be acquired as well. Bear in mind that our negative earnings growth forecast for FY12 stems from the incorporation of a lower tax realisation for 2011. Stripping out this factor, we estimate 2012 earnings growth at 16% YoY. With marginal revisions to our earnings forecasts and TP unchanged at Rp2,500, we reiterate our BUY rating on CMNP.

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TLKM: Building for future growth - ZP

FY11 result not exciting. Telkom reported a FY11 net profit of Rp10,965b, down 5% YoY and 5% below our expectations, as revenue growth (a weak 4% YoY) came in lower than that of expenses (7% YoY). EBITDA fell 1% YoY, and EBITDA margins fell to 51.3% from 54.1% in FY10. Cellular revenues were down 2% YoY, the first ever YoY decline. Note that SMS revenue is included in Data & Internet, which grew 21% YoY and became the second largest revenue generator. The company posted a 30% YoY increase in marketing expenses and a 17% rise in personnel expenses (as a result of Early Retirement Program).

Struggling in the midst of intense competition.
Telkom’s FY11 result shows that the increased marketing spend generated only lukewarm revenue growth. To compensate for slower growth, Telkom is continuing its cost-cutting efforts. It also cut capital expenditure; cash flow for investing was down 22% YoY to Rp7.66t. Securing growth opportunities from non-telco businesses, Realising that it cannot rely on the legacy telecommunication business, Telkom has actively pursued the Internet, Media and Edutainment businesses (IME) for the past 2-3 years. Telkom has ample cash and strongest balance sheet with the lowest net gearing among the big telecom operators. Hence, it has ample ammunition to roll out IME businesses and develop into the largest TIME player. Currently the IME business only makes up 6% of total revenue; the company expects this proportion to increase to 13-15% by 2014-15. At 12.5x 2012F PER, Telkom’s valuation still warrants a BUY. TP is Rp8,450 (pegging the stock at 14.0x 2012F PER, 4.2x 2012F EV/EBITDA)