Steady, with an Eye on BI Policy Shifts
What happened to the Property Sector?
The movement of JCI that strengthened ~5.5% YTD (as of 27-July) was negatively correlated with the movement of the property sector in our scope which weakened on average ~12% YTD. This price movement is in contrast to the marketing sales performance which grew 41.32% YoY and in 1Q22 managed to reach 26.59% of the FY22E target.
What Cause the Property Sector to be Unfavorable?
• On the macro scope, there is a risk of US superinflation (9.1% in June-22) causing the FFR to be aggressively increasing (150bps in 1H22), impacting the potential for interest rate hikes from central banks in almost all countries. The behavioral correlation of the increase in the benchmark interest rate brings a negative impact on the movement of property stock prices in Indonesia, since 70% of purchases are still through mortgages.
• In addition, ~50% of developers' debt in the form of USD SGD had a negative effect on IDR depreciation (exhibit 04). BI maintains 7DRR at 3.50%, resulting in IDR depreciating to IDR15,000/USD. However, we consider this risk to be quite manageable with an average DER of 0.41x in 1Q22. PWON is superior in this regard due to it hedges against USD debt.
What’s the Strategy?
• We see that the property demand will remain strong in FY22E with an average marketing sales growth of 7%-8% YoY in FY22E, despite lower incentives than the previous year. We believe that property stock prices should strengthen, primarily driven by: 1) strong commodity prices; 2) more launching properties after Eid; 3) increasing residential property price index by 1.77% YoY. Several companies have recorded marketing sales in 1H22 (SMRA 46%, CTRA 48%) which are still in-line with the target management.
• Interest rates for housing loans (KPR) fell 6bps to 7.94% in 1Q22, followed by apartment loans (KPA) maintained at 7.83%. Mortgage and KPA loans grew by 10.74% YoY in 1Q22, indicating a well-maintained demand. Meanwhile, the 1% of VAT increase should not be impactful on marketing sales, which we believe is offset by the government-borne VAT incentives (PPN DTP).
• Property sales are positively correlated with macro conditions, with the estimated GDP at 5% in FY22E (vs 3.69% in FY21) thus creating hope for the property sector. Furthermore, the correlation between property stock price movements and CCI is slightly in-line (exhibit 02). However in 1H22, there is a difference in the correlation movement due to the negative sentiment created. However, we expect stock movements to outperform, in line with a strong CCI figure which potentially increases above 100 level in FY22E.
• Moreover, selected developers to benefit from the PPKM relaxed that turn into higher mobility, following higher rental income from retail malls and hotels. PWON most benefit from this relaxation as recurring income rapidly grew by 38% YoY in 1Q22. We strongly believe that recurring income will cushion earnings when the sales do not match the full-year target.
OVERWEIGHT Recommendation for the Property Sector
We maintain the recommendation OVERWEIGHT outlook for Property sector in FY22E. The valuation is based on an average discount at the level of 55%-65% for NAV. It is also supported by positive catalysts from 1) Mortgage interest rates below 9%; 2) Implementation of the omnibus law. Our top choices are BSDE IJ (BUY; TP: IDR1,500), SMRA IJ (BUY; TP: IDR1,100), CTRA IJ (BUY; TP: IDR1,350) and PWON IJ (BUY; TP: IDR660). We note that these companies still rely on residential sales as their backbone, with averaging 64% of marketing sales coming from landed houses.
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