PP Properti

With the sluggish economic growth throughout 2015, most companies in BEI had decreased performances or even suffered losses. However, some of them, such as PT PP Properti Tbk (PPRO), are still in growth momentum. Until September 2015, PPRO earned net profit of Rp206 billion, it skyrocketed four times over the same period in 2014.

PPRO is the subsidiary company of PT Pembangunan Perumahan (Persero) Tbk (PTPP), one of the biggest integrated construction companies in Indonesia. In 1991, PTPP, previously only engaged in construction and related sectors, started to engage in its own real-estate by building Perumahan Otorita in Purwakarta, West Java, and continued with other projects. In 2013, PPRO was officially established as a platform for property business developer owned by PTPP.

Between 1991 and 2013, PPRO had built at least 24 residential projects, apartments, retail stores, hotels, malls, and office buildings in Jakarta and several other big cities. But then, since 2014, the company launched many property projects at once, and the biggest were two superblocks, they were Grand Kumala Lagoon in Bekasi, and Grand Sungkono in Surabaya.

Recently, the most common problem faced by property business are their income and profit rise and fall from year to year. A developer may succeed in earning big profit in certain years, but it may decrease drastically in the next year's as the business runs out property units to be sold. Meanwhile the forthcoming property projects are unready to be sold, because they are still in construction or planning. And if the net income of the property company falls, its stock price is also falling.

To overcome the problem mentioned above, some developers, including PPRO, try to have a portion of a company’s revenue that is likely to continue in the future (recurring income). Some examples of recurring incomes are the rentals of hotels, malls, and offices. But its value is usually tiny compared with income coming from the sales of real estate units. Including PPRO, where its recurring income is only 5% of the company’s total income (PPRO has a plan to increase it to 10% in the next two or three years, but it is still small).

However, PPRO’s revenues from the sale of property units will likely continue to increase in the next year's. For its two superblocks in Bekasi and Surabaya, the company plans to finish building the first apartment tower. The second apartment tower, and so on, gradually every year from 2014 to 2022 (Bekasi), and 2035 (Surabaya). For other projects it is still the same, they will be constructed step by step until 2019. If everything runs without any difficulties, then the company will keep earning huge profit and increase it every year, at least until 2019.

The question is can PPRO run its long-term plan on time and without significant problems? Does not the recent economy still struggle, so the property industry will inevitably get affected? Well, maybe not, because, first, unlike most other developers targeting the middle and upper class buyers, PPRO sells most of its products to the middle class at more affordable prices, so it is unlikely struggle against the risk of sluggish economic growth. Second, all the property projects owned by the firm are located in big cities and supported by an unabridged infrastructure, such as the access of toll road. Third, even though the economy is slowing down, the Government carries out many economic policies to hasten its growth, and one of the sectors got many attention is property sector. And the property sector itself is still growing and the infrastructure development by the Government.

Fourth, PPRO does not have big liabilities like some other developers, its net profit is safe from the risk of changes in interest rates or Rupiah exchange rate. And fifth, PPRO is supported by its parent company, PTPP, which is an proved construction company of state owned enterprise (SOE) and is likely to get many governmental projects from the Government, in which the existence of the infrastructures will increase the value of property units owned by the business.

So, we put aside the other property companies, I think that PPRO has a chance to keep its growth momentum that it has achieved it since 2014 and the several years later.

Then what about its stock? Although PPRO became one of the few companies yielded significant growth in 2015, but its stock remained affected by the fall of Jakarta Composite Index (JCI). PPRO issued its shares on May 19^th 2015 when JCI was in the 5,300, and its stock leaped from its early price of 185 until it reached 250. But with the downfall of JCI reached its lowest point 4,100’s in the last August-September, PPRO also fell to 127, or far below its early price.

But even though its stock price fell, the business did not have any problems at all, so its downfall was clearly a chance for value seekers. At the price of 127, PBV of PPRO was only 0.9 times, or in other words, you only had to pay Rp90 to earn the asset priced at Rp100, and the assets had a tendency to grow significantly in the next year's. Considering the big name of the company, its stock liquidity, its brilliant performance, and its bright outlook, the price at 127 was unreasonable. If JCI had started to rebound, and PPRO had kept its positive performances, its stock price would have likely climbed up easily.

And indeed, when I wrote this article, JCI started to rebound, but did not reach its previous position at 5,300’s, but PPRO rose significantly and back to its previous level of 190’s. For the future, PPRO may rise further or may fall again, but with the assumption the company still upholds its brilliant performances and JCI is also at least in the range of current positions, then there is no reason for PPRO to fall to its lowest level, right?

Disclosure: I wrote this article in October 2015 for Indonesian Forbes Magazine for the edition of November 2015, and rewrote in this blog with some changes. In October 2015 and its publish date (29^th February 2016), Avere holds PPRO at the average price of 173. The position may change without notice.

Original article was written (in Indonesian Language) in February 29, 2016. For inquiries, please contact the author by email, teguh.idx@gmail.com.