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IPO Prospect of PP Properti

In April 2014, Wijaya Karya (WIKA), one of the state-owned construction company in Indonesia, brought one of its subsidiary, Wijaya Karya Beton (WTON), to the Indonesia Stock Exchange through IPO. The proceeds were Rp1.2 trillion (about US$ 100 million), and the initial price of WTON was Rp590 per share. Before the IPO, the equity value of WTON was only Rp680 billion, which after divided by 6.7 billion shares, then the book value per share of the company was Rp102 per share. So it is quite clear that the public investor has paid the new shares of WTON at a very expensive price, ie almost 6-fold higher (590 versus 102) than the price ‘paid’ by WIKA as the majority shareholder of WTON.


Nevertheless, and probably because WTON’ financial performance was quite good throughout 2014 (its profit grew 33.6% compared to 2013), plus driven by positive sentiment related to the plan of infrastructure development by the Government during the year 2014, WTON still rose significantly until briefly reached 1,400, an increase of more than two-fold from its IPO price (though it has recently moving down back).

So when another state-owned construction company, Pembangunan Perumahan (PTPP), also bring one of its subsidiaries, PP Properti (the ticker has not been determined, but let us call it PPRO), to the trading floor, then investor’s attention may focus on the following question: Could the IPO of PPRO follow the IPO of WTON, who successfully made two-fold gain?

Because, just like IPO of WTON which was managed by four underwriters at once (so the ‘salesmen’ of its IPO were many), then this time the IPO of PPRO is even managed by five underwriters at once. I was initially wondered, why I received a lot of questions from investors about the prospects of PP Properti? But then I found out that that's because these investors received an offer from their brokers (who also the underwriters of the IPO) to participate in the IPO of PPRO. Including, the ads of the IPO are also exist everywhere, usually in the form of a review article about its 'prospects', written by brokerage analysts in the media, both print and internet (but do not worry, I can guarantee that you are now reading a completely independent analysis without any sponsor because just like you, I’m also an investor, not just a mere analyst).

In short, PPRO looked attractive because the IPO are very promoted, not because the company’s fundamentals are actually good. If the IPO only managed by one underwriter, then perhaps its IPO will not be so sounding like today. On the other hand, since the birth of PPRO to the world of Stock Exchange was taken care of by five underwriters at once, then the chance of success (read: the stock rise) is fairly large unless the fundamentals of the company are very bad, say like the IPO of Garuda Indonesia (GIAA).

Anyway, let's try to learn this PP Properti since the beginning.

In 1991, PTPP as a construction company, for the first time went into the business of property developer by building Perumahan Otorita in Jatiluhur, West Java, this time in its capacity as the developer, not constructor. Since then, PTPP work on many other property projects. In 2010, PTPP made its property portfolio as one of the main business lines outside the construction as the core business of the company. And in 2013, PT PP Properti (PPRO) was officially established as a home for property business units under PTPP.

If we look at the young age of the firm, then of course PPRO did not have a solid track record in the long term where its recorded financial statements has just started in 2013, or two years ago. In the business of property development, PTPP’ experience is also not more than 24 years (counted from 1991). With Rp2.7 trillion (about US$ 240 million) of assets at the end of 2014, PPRO is a small company especially when compared with the top property developers in Indonesia (Lippo Karawaci/LPKR, the largest property developer in Indonesia, had an asset of about US$ 3 billion at the end of 2014). Related to the company's prospects, PPRO also does not offer any significant prospects of future developments. At the end of 2014, PPRO has landbanks of 54 hectares only which will be developed within the next 15 – 20 years (including using the proceeds from its IPO). When compared with the landbank of Bumi Serpong Damai (BSDE) which more than 7,000 hectares, for example, then PPRO is clearly insignificant.

However, PPRO still has an advantage from its position as a subsidiary of PTPP which is one of the largest and well-established construction company in Indonesia, and the stock of PTPP itself has been gained much since its IPO in 2010, at the price of 560 (currently PTPP is traded at Rp3,850 per share). As a result, PTPP become one of the most popular construction companies in Indonesia, or at least in the eyes of investors in the Stock Exchange, so PPRO itself also became popular. In addition, the small number of company-owned landbanks is because PPRO is focus on building the superblock, which does not require vast land.

And perhaps the most important factor is, PPRO financial performance is currently in a tremendous growth momentum because there are a lot of property projects that have been started since 2012 (PPRO was then one of the divisions under PTPP), which began to produce net profit in 2014 in which the company's profit soared compared to 2013 (percentage of the increase can not be precisely calculated because PPRO financial statements for the year 2013 is only for a period of two months, ie from November to December), and the growth trend shall continue in this 2015. At the end of 2014, PPRO have at least twenty-one property development projects ranging from Patria Park Hotel to Grand Slipi Tower, where there are many of them who have started to ‘bear fruit’, but the fruit itself has not been ‘harvested’.

So if we look at the experience in WTON, if PPRO posted an increase in net profits in its financial statements for the first half of 2015 (PPRO will listing on the Stock Exchange for the first time on May 19, so the company would not have time to publicly release its financial statements for the first quarter of 2015), the shares would likely to rise significant even if the valuation is already high. In this case we won’t need to looking forward at the future prospects of the company related to the use of proceeds from the IPO, because PPRO would require a long time (at least 2 – 3 years) to use the proceeds to generate additional profits.

And what about the valuation of the shares? Is it also expensive like WTON was?

For those of you who still unfamiliar with value investing, you may be confused about how to determine whether the stock of PP Properti is expensive, reasonable, or cheap. But it is so simple: At its IPO, PPRO will sell new shares to the public at the price ranging from Rp185 to 350 per share. Before the IPO, the equity value of the company was Rp1.0 trillion PPRO, while the number of shares is 9.1 billion shares. Thus, the stock value is Rp1 trillion divided by 9.1 billion of shares, equal to Rp113 per share. If the new shares released at the lowest prices 185 per share, then it means that you as a new shareholder in the company only needs to buy the shares at a slightly higher price (185 compared to 113, meaning 1.6 time) than the paid-up capital from PTPP as the original owner of the company who is also in charge for the company's operations.

And I think it is a relatively low price, or even very low if compared to the price of WTON a year ago. If PP Properti is actually sold at the price of 185, and if in next May the Jakarta Composite Index (JCI) is is still stable at the current position (5,400’s), then the stock will likely to rise significantly since its first listing, and will continue to rise if its latest financial statements (financial statements of first half of 2015 will be published at the end of July 2015) of the company successfully recorded a growing performance.

However, if the new shares are released at a price of 350, then of course it can not be said to be cheap anymore. Besides, the larger increase in PPRO equity (because of the large fund from the proceeds of the IPO) will also cause the company’s ROE to be very small, and it could be a negative catalyst for the stock. But well, let's hope that this PP Propert will be sold at a price 185, or (maybe) even lower.

PT PP Properti, Tbk
Rating of Performance on 2014: A
Rating os Share Price at 185: AA

Any inquiries about investment in Indonesia Stock Market? Please send an email to teguh@averepartners.com.

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