Indonesia Property Sector
SECTOR REVIEW
Challenged by headwinds
Risks of higher inflation and interest rates have dampened the outlook for
Indonesia’s property sector. Despite robust YTD marketing sales, we are
opting to stay ahead of the curve, as we see disappointment risks for
2H08E on the soft macro outlook. Indonesian property counters’ share
prices are highly correlated with inflation and interest rates. We have thus
turned less bullish on the sector given the softer macro outlook.
■  Inflation and interest rate threats. Our economic team sees a risk of inflation
reaching 10%, driven by food inflation. Given the central bank’s history of
addressing inflation by hiking interest rates, most recently in 2005, we see a
100 bp upside risk to the benchmark interest rate (to 9%).
■  Lowering our estimates. We are cutting our FY08-9E earnings estimates
for the four Indonesian property counters under our coverage, given the
softer property sales outlook. We are also reducing our 2008E RNAV
forecasts for the sector by 10-36% given 1) expectations of softer property
sales and 2) assumption of a higher risk-free rate.
■  Every cloud has a silver lining. Recent sharp share price corrections have
led CTRA, CTRS and SMRA to trade at trough valuations, with little
downside risk. We downgrade CTRS to NEUTRAL from Outperform and
maintain our NEUTRAL rating for SMRA due to a lack of positive catalysts,
despite their attractive valuations. We maintain our OUTPERFORM rating
for CTRA given its 1) relatively low downside risk to our worst-case scenario
and 2) larger market capitalisation and daily traded value, which could make
it the first to turn around when a recovery occurs. We downgrade LPKR to
UNDERPERFORM from Neutral on its stretched valuation and the softer
macro outlook.