May 24, 2010

J.P.Morgan downgrades Bakrieland

Emerging details of PT Bakrieland Development Tbk (ELTY)’s rights issue should exacerbate recent underperformance. 
A Rp5.4 trillion rights issue, the company’s third within the last 5 years, is about 5 folds larger than we had anticipated. ELTY issued US$155 million of equity-linked bonds in March 2010, after which we viewed that the financing risk for Bakrieland was subdued, as net gearing was just 60%.  This contention is no longer valid and the key to our change in view.
Bakrieland's rights issuance for Rp5.4 trillion (150% of market cap) is to be used for various acquisitions or developments, i.e.; stake purchase in Sentul City, capital infusion in Bukit Jonggol Asri, and LIDO (a development near Jakarta). While the broad catch of these properties is somewhat close to ELTY’s assets, our outlook is negative as much of the land is undeveloped.
"We also note a rising risk that the marketing sales and toll road traffic might fall short of forecasts. According to the 1Q10 revenue numbers, the toll road traffic in the first two months is only 7,300/day versus our expectation of 13,000 per day," said J.P.Morgan's analyst Liliana Bambang in a research report published on May 21.
Updated data indicates that ELTY’s monthly marketing sales in the next few quarters has to be up by 80% in order to meet our FY10E forecast of Rp600 billion.
Since the news broke of the rights issuance, Bakrieland has underperformed the JCI index by 20%. We do not see this reversing, and the stock is likely to remain as an underperformer as financing risk remains high for
ELTY due to its huge appetite for growth. 
"We attach wider discount of 70% (in line with previous troughs, but also corresponding to a 68% post
rights) from previously 25% for ELTY to its NAV. Our new Dec-10 target price is Rp150 (previously Rp325). Scaling back aggressive financing needs or strong volume growth could result in upside risk to
our price target," she said.

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