Soft overall performance
SMRA delivered another tepid performance for 3Q17 as the laggard trend it has exhibited since 1Q17 continues. Revenue was reported at IDR 1.3 tn (-10% QoQ, +1% YoY), operating profit at IDR 296.1 bn (+22.8% QoQ, -4% YoY), and NPAT at IDR 70.6 bn ( +113% YoY; Figure 1). In terms of cumulative performance, SMRA’s 9M17 top and bottom lines met 73.89% and 35.48%, respectively, of our revised FY17F projection. Furthermore, gross profit grew slower than expected (+4.8% YoY) as gross margin contracted at 43.2%, down 2.35%. We believe this was due to an elevated portion of revenue recognition from high-rise projects. (Springlake Bekasi and MTown Serpong). In terms of costs, SG&A expenses rose by 9.5% YoY to IDR 889 bn, in particular from rising promotion and advertising expenses. Overall 9M17 bottom line performance came in below our and consensus’ expectation at 35.48% and 36.1%, respectively.
Marketing sales achievement has some catching up to do
Sluggish marketing sales hampered SMRA’s earnings delivery in 3Q17 as marketing sales in 9M17 only reached IDR 1.99 tn (-9.6% YoY vs. 9M16’s IDR 2.2 tn), achieving 56.65% of the company’s revised full-year marketing sales target of IDR 3.5 tn. There were several projects launched in 3Q17 such as Sapphire Commercial Karawang, Cynthia Bandung phase 2 and Burgundy Residence Bekasi phase 2. Looking at those projects, we note that the take-up rates for the launches conducted by SMRA in 3Q17 varied from 33% – 82%. We believe the wide-ranging take-up rate occurred due to customers being more selective in acquiring properties. Limited price appreciation, flat rental yields and hefty price discrepancies between the primary and secondary markets, we expect customers’ appetite to be remained selective until at the end of the year. Due to this reason, we expect recognition from one-off land sales, which should help buffer 4Q earnings. We forecast SMRA to book revenue of IDR 1.411 tn and net profit amounting to IDR 218 bn in 4Q17.
We are cautious on interest coverage level
Currently, SMRA net debt level stood at IDR 5.84 tn in the third quarter, rose 2.5% from IDR 5.69 tn in the second quarter. Net gearing, thus, stood higher at 70.7% vs. 69.3% in 2Q17. We are cautious with SMRA’s interest coverage which currently stood at 1.49x as it was below the sector average threshold at 2x. Meanwhile, operating cash flow was recorded positive at IDR 104 bn but lower than the previous period of IDR 146 bn and sales advances increased slightly to IDR 2.8 tn from IDR 2.7 tn in 2Q17.
Rating and Valuation
We maintain our HOLD recommendation but revised the 12 month forward target price from IDR 1,180 to IDR 1,110. We downgraded our FY17/18F earnings by 43.56%/21.49% due to extensive pressure on its operational margin from prolonged interest burden and low revenue recognition. Our view remains neutral on SMRA as margins contraction and lethargic marketing sales achievement will continue to undermine its bottom line until majority of revenue backlog from previous high-rise projects can be recognized. Currently, SMRA is trading at FY17/FY18 P/E of 43.7x/31.7x and FY17F RNAV of 62%.