Deep-dive 2021-20: Pakuwon Jati

Pakuwon Jati (PWON IJ) is an Indonesian property developer focusing on so-called “superblocks”. It acquires land around a centrally located area, builds a shopping mall, and then adds surrounding properties such as condos, serviced apartments, offices, hotels, etc.

Half of Pakuwon’s revenues are recurring (retail mall leasing, office leasing, hotels). The other half comes from property development (condos, landed houses).

I’m impressed with Pakuwon’s management team. Alexander Tedja is brilliant. During the pandemic, Pakuwon took the opportunity to acquire a competitor’s mall at a normalised 13% cap rate. Whereas most other Indonesian developers accumulate massive landbanks, Pakuwon is going for an asset-light model. It only acquires the land required for near-to-medium term developments.

The industry backdrop for high-rise construction is excellent. Only 6% of Jakarta’s population lives in high-rises, compared to over 90% in China. With many professionals living in suburban townships, commutes can be up to 3-4 hours per day. Living in a central location next to a mall and office makes perfect sense.

Indonesia’s credit growth has started to accelerate. In the latest investor calls, Pakuwon said that mortgage approvals have become very easy to get. Mortgages now have tenors up to 15-20 years. With interest rates at record lows, affordability has never been better. And this is against a backdrop of almost zero leverage in the industry - mortgage debt/GDP in Indonesia is only 3% vs 40% in Malaysia.

COVID-19 hurt Pakuwon in two ways. It proactively gave discounts to its tenants of up to 50%. Second, during the pandemic, pre-sales of landed houses and condos dropped temporarily. Tenant discounts are also narrowing, especially in Pakuwon’s key market of Surabaya. And pre-sales have already recovered completely.

If Pakuwon were listed as a REIT in Singapore, the stock price would probably be 3x today. The dividend payout ratio has indeed been low. But with a high teens ROE, reinvesting the capital into new superblocks makes perfect sense. With simple assumptions about recovery from COVID-19 and mid-teens NLA growth from the new Bekasi project, the stock likely trades at a P/E 7x on 2024 earnings with reasonable assumptions. If Pakuwon trades at P/E 15x at that point, that would imply an upside to an intrinsic value of +117%.

There have been a few related party transactions in the past. But given Pakuwon’s consistent earnings growth, transactions must have been done at fair multiples.

Then there is the issue of succession, given that Alexander Tedja is 76 years old. But at the moment, he is still heavily involved in the business.

Another pushback I expect is the threat from e-commerce. But Pakuwon’s malls are focused on experiences - not storing inventory. Indonesia has a tropical climate, and shopping malls are the default place for families and young people to hang out. While the tenant mix will certainly shift away from department stores to product discovery and experiences, Pakuwon is well placed to adjust to this new reality.

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