Three property companies under Ciputra brand are going to do a merger on December 23rd, 2016. Two subsidiaries of CTRA, CTRP and CTRS, are going to be merged into CTRA. The merger use share swap with the ratio of 2.13x for CTRS and 0.54x for CTRP. In this valuation I’m not going to discuss the effect of the merger itself, but rather the valuation of CTRA alone.
Download the excel file containing full valuation: ctra-3q16
This year CTRA revenue is declining due to the slowdown in credit and demand in the property sector, however the impact of successful Tax Amnesty and increasing middle class of Indonesian demographic is expected to drive growth for the next few years. In my valuation using Free Cash Flow to Firm (FCFF) method, it results in fair value of Rp 2200/share, a 60% upside from Friday, December 16th 2016 price of Rp 1370/share.
I compare the result from FCFF method to historical sector PE, PS, and PBV ratio pictured below. Trailing PE is currently at the 5-years high level due to the declining profits of many property companies this year, but it is expected to reverse next year, hence the valuation may be justified. Using the historical sector PBV ratio, it results in fair value of Rp 2140/share, similar to the value derived from FCFF method.
In summary, I believe CTRA valuation is attractive currently, and with the good prospect of the merger, I recommend BUY for CTRA with TP Rp 2200/share.
However, instead of buying the CTRA stock directly, there is an alternative to it. You could buy CTRS and CTRP for a bargain price. On Friday, below is the price of each stock intraday on December 16th 2016:
CTRA = 1370
CTRP = 680
CTRS = 2720
The merger use share swap with the ratio of 2.13x for CTRS and 0.54x for CTRP. Therefore the equivalent value of each stock (if CTRA = 1370) using no-arbitrage rule is:
CTRP = 1370 x 0.54 = 740 (8.8% discount)
CTRS = 1370 x 2.13 = 2920 (7.4% discount)
Therefore, assuming the merger is closed, CTRP provides the greatest value to stockholder, an upside of 8.8% + 60.09% = 68.89%. But acquiring a big lot of CTRP and CTRS prove to be difficult due to the thin liquidity of each stock compared to CTRA.