TBY talks to Bonny Budi Satiawan, CEO of Mega Manunggal Property, on a year of expansion, keeping debt low, and expectations for 2018.

You came on as just CEO last year and had a year of aggressive expansion, including major investments and profit increases. What drove your returns?

In 2017, we had a significant project come online that increased revenues considerably. That project was a 30,000sqm warehouse for Lazada, an Indonesian e-commerce company. The margin for each individual built-to-suit warehouse is high because our costs are only insurance, property and building taxes, and technicians' salaries; hence, our profits increased. Other key moves that allowed us to increase profitability were efficiency in payroll; almost 50% of our operating expenses come from salaries. We managed to recycle employment so when people retire we hire new ones that meet our needs. By the end of March 2018, we will have three more warehouses totaling 100,000sqm. If one warehouse at 30,000sqm increased profits by 15%, you can imagine what three times that volume will do.

Your business is capital intensive. Do you prefer banks or capital markets, and what is the reasoning behind your recent rights issue?

We have not taken on much bank debt. We have about USD37.4 million of debt and USD339 million of liquid equity. As a result, we have kept our debt low and opted for the rights issue. There is something interesting that we do when we need to borrow: we build a warehouse using equity money, wait until we have started to generate cash flow, and then we borrow money using the assets as collateral. This lowers the rate. We have about 35ha of land at this point in time, to develop it we need to borrow money.

What changes have you brought in since you became CEO?

When I started as CEO, I changed many things. One of the things is I told everyone that we need to focus on three aspects: tenants, suppliers, and employees. Tenants bring you profit and revenues, the supplier brings you yields, and the employees execute. Then, there are the yields that our shareholders want. Fourth is the funding, fifth is land banking, and the last is execution. We have a team here that takes note of the risk; every business decision we make is passed on to this division. We look into the resources and limitations, and what we need to do to make sure it is sustainable.

Between leasing out an entire space to one client (BTS) and having a multi-tenant arrangement, what is your preference?

My preference is for BTS; however, we cannot deny there is going to be a balance between the two because BTS locks you in for five to 10 years. However, multi tenants require you to set a price. BTS provides security and safety of your finance and cash flow. The difference between BTS and multi tenants is simple, if you have a location in a prime area, you do multi-tenants because the price of the land is expensive; however, many people will go to that location. You can then charge a higher rate because of this, and you also have to spend more to market it, but its profitable.

You have rapidly gotten commitments for all of the new spaces that you build. What is driving demand in Indonesia today?

First, we had to educate the market, because our warehouses are not traditional warehouses, which are low in terms of height. In ours, you can stack up to eight pallets, which is double the volume. Our price is based on square meter, so it is higher than others, but with this per square meter rate you can stack up a great number of palettes, which makes us appealing. In terms of trends, FMCG will continue to grow, but there will be a point where it will not grow anymore. There will be a lot of changes in terms of SKU's etc. FMCG is still doing well and capacity continues to grow. Ecommerce is interesting, but the only thing that worries me is that none of it is making money. Therefore, the way we mitigate risks is not to avoid them but to make sure our design caters to other sectors. It's a volume game.

What are your plans and expectations for 2018?

I am quite optimistic. The business plan I submitted in 2016 was that 2017 would be tough, and this was the case. Our strategy is to get into land for future growth, because when things are slow there is a lot of cheap land. We have 35ha and we can develop a greater volume in 2018. If you look at the cycle of warehouses, then at the end of five years people want to consolidate everything. If you are centralized, it is efficient; we are seeing that happen now. As of now, we have roughly 70-80% more enquiries compared to 2017. These are for delivery in mid-2019 to 2020. I assume that in the second half of 2018 things will pick up, because I can see who the tenants that come to us are—all the large multinationals. Effectively that means large growth in revenues and capacity. Then much later, once we have developed this 35ha, we will sell our completed projects to REITS to finance more construction. This is how we will manage cash flow and stay profitable in the long term. We are going to have five warehouses delivered in 2019 with a total capacity of around 240,000sqm. We will do this in phases to fill the capacity at a consistent pace. Certainly, logistics and warehousing isn't going anywhere, and consumer spending will pick up this year. We see ourselves as a much larger and more profitable company shortly.