Alam Sutera Realty, Laying The Foundation For Growth

ASRI remains one of our top pick, given: (i) its strong future growth and profitability, (ii) the successful launch of its second project, “Suvarna Padi” in Pasar Kemis, and (iii) its grand plan to acquire more land in Bali and Jakarta. Our TP of IDR600 was derived by applying a lower discount of 25% to its Serpong project and a 30% discount for its Pasar Kemis and other projects, without incorporating its upcoming capital-raising proposals involving the issuance of bonds and non-preemptive rights. The counter is currently trading at a 47% discount to its NAV of IDR843/share, implying a FY12f PER of 12.9x. We maintain our BUY call on ASRI.

Steady growth
Thanks to buoyant demand for affordable housing in Serpong area and better accessibility, the land price in Serpong has risen by five-fold to IDR5.5m/sq m for residential plots and IDR10.9m/sq m for commercial plots. As such, company’s 9M11 gross margin reached 57%, with an ROAE of 18% – the highest among listed property companies under our coverage. Its balance sheet remains strong with net cash of IDR408bn and some IDR1.8trn worth of potential revenue recorded as advanced sales.

Pasar Kemis to hand out more revenue
We expect a lower pre-sales contribution from Serpong in the coming years, in view of the depleting landbank. Nonetheless, the slower sales there will be compensated by increasing sales from ASRI’s second development in Pasar Kemis. In Oct 2011, the company launched the first cluster of properties called “Suvarna Padi” in Pasar Kemis.

The response has been positive, with 75% of the total 400 units being offered sold, adding more than IDR300bn to the company’s 9M11 pre-sales of IDR2.3trn. The selling price for this project is around IDR2m-2.5m/sq m, which is higher than our previous estimate of IDR1m-1.5m/sq m.

Big growth plans
It plans to acquire more land in Bali and Jakarta estimated at a total IDR2trn. The acquisitions will be funded by a combination of equity (non-preemptive rights) and debt (USD-denominated bonds). The USD bond issuance, expected to be completed by year-end, is estimated to carry a coupon rate equivalent to 11% in IDR. The non-preemptive rights will require shareholder approval at the EGM held on 25 Nov 2011.

We think the company’s strategy to raise funding through bonds and equity is prudent considering the restriction of bank borrowings in acquiring landbank. Any concerns over the newly acquired assets should be mitigated by: (i) the company’s proven track record in maximizing its property value, (ii) the assets acquired are non-affiliated assets, and (iii) our channel checks suggests that its new assets will generate an IRR of 20% and recurring income of IDR250bn per annum.