Modest 1H17 earnings
CTRA booked 1H17 net profit of IDR 340 bn (+9.64% YoY), forming 30.91% and 30.4% of our and consensus’ FY17 estimates. It is noteworthy that this was below than the CTRA’s 5-year historical seasonality trend. It would seem that weak 2Q17 bottom line derived mainly from higher opex and final tax expense (+134.2% and +18.12% respectively). Furthermore, better 2Q17 gross margin of 51.4% (+3.9% QoQ) was driven by higher landed residential sales but higher opex from several JO projects caused an offset, resulting EBIT margin retrenchment to 19.4%. This then led to a decline in operating profit growth of 2.7% YoY, below our and consensus’ forecast.
Net gearing looms but acceptable
We believe CTRA’s subdued aggregate marketing sales achievement in 2016 shows that aggregate marketing sales has stagnated and forced CTRA to allow property buyers to extend their installment period. As a result, the company had to rely on additional debt to fund construction of its projects. Furthermore, CTRA’S share price has been weak since 2H16 to date, we believe this is largely due to earnings deterioration from rising interest expenses. The rising interest rate is due to debt taken to finance land acquisitions and working capital for high-rise development. Currently, net gearing stands at 24.2% which rises quite a bit by 7.62% (YoY). This is mainly due to higher proceeds from short term bank loans in 2Q17. In our view, the current level is, to some extent, healthy and below sector average at 56%. We expect an earnings improvement to start showing in 2H17 as the company is slowing its land acquisition and changing product-mix to ensure a larger contribution from housing, which requires less working capital and higher margin.
Stronger marketing sales in 2H17 and potential earnings recovery in 2018
CTRA accumulated IDR 364 bn (+17% MoM) of pre sales in July 2017 with overall 7M17 marketing sales at IDR 3.3 tn (-3% YoY). This has a run rate of 39% and 40.64% of the company’s and our estimates, still somewhat lackluster compared to 7M16 at 50% of FY16 marketing sales. Marketing sales were driven by Greater Jakarta and Surabaya by 46%, followed by Inner Java cities by 20% and Sumatra by 8%. CTRA plans to launch The Newton 2 in 2H17 with 600 units and is expected to generate IDR 400 bn of pre-sales. Furthermore, a mixed use development in Batam with gross area around 70k sqm will be launched in 2 months and is expected to raise IDR 300 bn. Lastly, we believe that strong current revenue backlog of IDR 12.5 tn should help CTRA to record revenue and bottom line growth in 2018 as company is due to recognize its bulk revenue from massive unit handover from pre sales FY15.
Rating and Valuation
We reiterate our BUY recommendation and maintain 12 month forward target price of IDR 1,480. Our view remains positive on CTRA given its solid cash position and a chunk of revenue backlog will be reduced by next year. Currently, CTRA trading at an attractive valuation 19.8x FY17E P/E and 59.5% discount to RNAV.