Soft 9M17 earnings
CTRA delivered a soft performance as 9M17 net profit declined by 8.4% YoY to IDR 566 bn, accounting for 65.54% of our revised projection and 54.6% of consensus’ estimates. We believe laggard 9M17 earnings were mainly caused by property sales margin contraction, slipping from 77% to 75%, in conjunction with a lower 9M17 net margin of 13.0% vs. 14.0% in 9M16. On a quarterly basis, CTRA posted higher 3Q17 net profit of IDR 227 bn (+84.3% YoY) on the back of lower opex (-39.6% YoY). Meanwhile, CTRA’s residential and shop-house sales declined slightly, by 5.5%, and apartment sales were hugely disappointing (-33.7% YoY). Revenue in 3Q17 alone only contributed IDR 1.5tn (-2.1% YoY), despite the company has not recognized land sales amounting to IDR 239 bn.
Net gearing increased due to higher interest-bearing debt
The Company held higher net debt level at IDR 3.96 tn with net gearing of 30.3% vs. IDR 3.56 tn of net debt and 27.7% of net gearing in 2Q17. The issuance of SGD 150 mn of Medium Term Notes in September 2017 has contributed to the rise of net debt level. The proceeds from the MTN will be used to refinance its current outstanding MTN of SGD 47 mn that will fall due in February 2018. Carrying a lower coupon rate (4.85% vs. 5.625%), we expect CTRA to record lower interest expenses in 2018 (down from IDR 642 bn in 2017 to IDR 597 bn in 2018). Despite the rencent increse in net gearing, CTRA still has among the lowest net gearing levels in the sector, third next to BSDE and PWON. Mean while, operating cash flow remained positive at IDR 334 bn, higher than IDR 18 bn reported in 9M16. Furthermore, Sales advances stood similar with 2Q17 figure at IDR 6.5 tn, which were still higher than IDR 5.8 tn recorded in 2Q16.
Marketing sales achievement falling short of target
In 3Q17, CTRA recorded marketing sales of IDR 2.3 tn which saw the 9M17 marketing sales to IDR 5.3 tn, up by 21.5% YoY. The launch in North Citraland has supported the marketing sales achievement in which generated IDR 1.1 tn. The 9M17 marketing sales run rate currently stands at 65.43% of our full year target of IDR 8.1 tn and 61.8% of the management’s target of IDR 8.5 tn. We identify there will be several major drivers to support marketing sales in 4Q17. First, CTRA have an agreement with The Ascott Limited to sell 192 serviced apartments in Ciputra World 2 Jakarta with total value of IDR 675 bn. CTRA expects the marketing sales to be recognized in November 2017. Secondly, CTRA plans to launch Newton 2 by early November 2017 at the latest. Thus far, take up rates are less than 60% of the total units offered (624 units). From the Newton launching, we expect CTRA to obtain additional marketing sales of IDR 450 bn.
Rating and Valuation
We reiterate our BUY recommendation but revised 12 month forward target price of IDR 1,480 to IDR 1,360. We downgraded our FY17/18F earnings by 21.31%/3.49% due to slower revenue recognition. Despite lower earnings forecast, we continue to like CTRA, as its diversified project portfolio and a decrease in revenue backlog could potentially help outperform peers when property market recovers. CTRA is currently valued at 21.4x FY18E P/E and 55.7% discount to RNAV.