Initiation report 9 January 2018
Indonesia Construction OVERWEIGHT
(Initiation) Ricky Ho Heribertus Ariando E-mail: [email protected] E-mail: [email protected] Phone: +6221 250 5081 Ext. 7612 Phone: +6221 250 5081 Ext. 5618
Winds of reversal Initiating coverage with OVERWEIGHT rating: We initiate coverage of Exhibit 1. Sector aggregate orderbook the Indonesia construction sector with an OVERWEIGHT rating, highlighting 700 70% Carry over New contract WSKT turnkey payments and the possible asset divestment of its subsidiary % y-y growth (RHS) 600 60% Waskita Toll Road (WTR). Despite delivering strong earnings growth and
higher-than-expected margin, the market seems reluctant to reward SOE 500 50% 218 218
contractors’ achievements, mainly on the back of deteriorating operating 199 400 40%
cash flow (OCF) and higher balance-sheet risk. Sector valuation has derated 182 IDRtn to -2STD of its 5-year average PER, with all SOE contractors currently trading 300 195 30%
at attractive single-digit PERs. Given that we believe expectations have hit 200 20%
174 174 362 362
their nadir, we think possible surprises from the two afore-mentioned factors 331
293 293
98 98 70 70
100 209 10% 61 61
above might renew the interest towards the sector, hence we believe this is 60
48 48
116 116
81 81
65 65
54 54 42 42 the right time to revisit the sector. In addition, we think the sector is lightly- - 34 0%
owned given its underperformance of 40% versus the JCI last year, thus any
2011 2012 2013 2014 2015 2016
2020F 2018F 2019F key positive development could likely surprise to the upside. 2017F Source: Company data, Bahana estimates Focusing on capital creation: While attaining new contracts is important, Exhibit 2. Sector aggregate earnings we think the market has turned its focus from new contract achievement to 12 PTPP net profit 70% capital creation and thus SOE contractors that are able to recycle their capital WSKT net profit WIKA net profit 60% shall outperform their peers going forward. The other implication is that the 10 ADHI net profit winner could bid and go after more projects if they are able to churn their % y-y growth (RHS) 50% 8 balance sheet, thus moving ahead of the curve as compared to their peers. 40% In all, focusing on companies with capital creation implies that investors need 6 to watch out for three main factors: (1) receivable collections outlook IDRtn 30% 4 (working capital), (2) leverage capacity, and (3) marginally improving FCF. 20% Our pecking order for stock selection is WSKT > WIKA > PTPP > ADHI. 2 10% WSKT is our top pick: WSKT is our top pick within the Indonesia
construction space given the company could be the biggest operating cash - 0%
2012 2013 2014 2015 2016
flow (OCF) turnaround candidate. We have priced in IDR16.1tn worth of 2011
2019F 2020F 2018F 2017F turnkey payments (IDR10tn from LRT South Sumatra and IDR6.1tn from Source: Company data, Bahana estimates Sumatra Transmission line), resulting in lower receivables, into our 2018F Exhibit 3. Sector aggregate OCF financial forecasts. We view the turnkey payments from WTR could only be 40 realized once the asset divestment is fully executed. Based on our discussion 30 with bidders, there is a valuation gap between what management is asking 20 and what the bidders are willing to pay. Therefore, we believe the likely 10
divestment scenario is through an IPO of Trans Java, which could likely bring - IDRtn WTR fresh cash of IDR4.0-4.9tn assuming the deal happens at 1.5-1.8x PBV. (10) Initiate with a BUY rating with TP of IDR3,500. (20) Rising tide lifts all boats: We believe the likely improved sentiment from (30) WSKT’s improving OCF will benefit the other SOE contractors. We like WIKA (40)
for its (1) heavy involvement in national railway projects, which could groom
2013 2012 2014 2015 2016
2017F 2018F them to be a preferred SOE contractor of choice for future railway projects, Net profit Depreciation (2) strong corporate governance and (3) relatively healthier balance sheet. Changes in WC: receivables Changes in WC: Inventories Changes in WC: payables Others We initiate WIKA with a BUY rating and TP of IDR2,200. We also have BUY Source: Bahana ratings on PTPP and ADHI with TPs of IDR3,500 and IDR2,400 respectively. Key downside risks: (1) slower-than-expected WSKT turnkey payments and WTR asset divestment, resulting in negative sentiment towards the sector and (2) SOE contractors aggressively taking more turnkey projects and less profitable investments in the next two years to accelerate the government’s infrastructure programs prior to the election.
Disclosure: PT. Bahana Sekuritas does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision. Please see the important disclaimer information on the back of this report 9 January 2018
Table of Content
1. Operational and valuation metrics comparison Page 3 2. Initiate coverage with OVERWEIGHT rating Page 5 3. Orderbook will continue to grow Page 7 4. Improving OCF Page 11 5. Leverage will remain elevated to support working capital and, Page 11 investment, although at a more moderate pace 6. ROEs will continue to climb closer to a level prior to state equity injection Page 11 7. Will funding issues slow down infra execution progress? Page 12 8. Focusing on capital creation Page 15 9. Corporate: WSKT - Capital recycling is on its way Page 17 10. Corporate: WIKA - Awaiting HSR disbursement Page 31 11. Corporate: PTPP - Strongest balance sheet Page 38 12. Corporate: ADHI - All clear! Page 45 13. Corporate: WSBP - Concrete player Page 52 14. Corporate: WTON - Diversified precast producer Page 59 15. Infrastructure: Cornerstone for future growth Page 66 16. Indonesia infrastructure: Reform is on progress Page 72
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 2
9 January 2018
Operational and valuation metrics comparison The following table is a comparison of the operational and valuation metrics of the four listed SOE contractors and two precast companies. We have a BUY rating on WSKT (TP: IDR3,500), BUY rating on WIKA (TP: IDR2,200), BUY rating on PTPP (TP: IDR3,500), BUY rating on ADHI (TP: IDR2,400), BUY rating on WSBP (TP: IDR645), and BUY rating on WTON (TP: IDR610).
Exhibit 4. Operational and valuation metrics comparison 2018F WSKT IJ WIKA IJ PTPP IJ ADHI IJ WSBP IJ WTON IJ Stock information Market capitalization IDRbn/USDbn 31,220/2,329 14,173/1,057 16,616/1,239 6,748/503 10,861/810 4,532/338 3M average daily turnover IDRbn/USDbn 50.9/3.8 43.6/3.3 37.5/2.8 38.2/2.8 48.1/3.6 15.1/1.1 Free float % 34% 35% 49% 49% 40% 40% Ratings BUY BUY BUY BUY BUY BUY Current price IDR/share 2,300 1,580 2,660 1,880 412 520 Bahana TP IDR/share 3,500 2,200 3,500 2,400 645 610 Upside/downside % 52% 39% 32% 28% 57% 17% Operational data Orderbook 2018F IDRbn 166,754 142,972 109,399 56,292 31,443 15,182 2019F IDRbn 188,914 154,758 128,522 57,960 38,284 16,887 Orderbook growth 2018F % 20% 18% 22% 3% 32% 22% 2019F % 13% 8% 17% 3% 22% 11% New contract 2018F IDRbn 69,453 49,349 43,303 19,965 14,795 7,586 2019F IDRbn 76,399 52,932 47,781 21,962 16,274 8,345 New contract growth 2018F % 21% -19% 10% -47% 10% -11% 2019F % 10% 7% 10% 10% 10% 10% Burn rate 2018F % 33% 29% 26% 36% 30% 44% 2019F % 35% 30% 26% 39% 30% 44% Orderbook/revenue 2018F x 3.2 4.3 4.2 3.0 3.3 2.3 2019F x 3.0 4.6 4.2 2.8 3.3 2.3 Financial data Earnings growth 2018F % 26% 20% 42% 29% 23% 32% 2019F % 6% 28% 27% 21% 20% 16% Debt/equity 2018F % 130% 71% 69% 136% 51% 67% 2019F % 146% 64% 64% 122% 52% 63% Net debt/equity 2018F % 108% 46% 21% 96% 30% 57% 2019F % 137% 50% 30% 98% 37% 54% Receivable-to-revenue 2018F x 0.6 0.6 0.8 0.7 1.3 0.2 2019F x 0.7 0.6 0.8 0.7 1.3 0.2 ROE 2018F % 22.7% 12.2% 14.6% 11.1% 15.5% 14.9% 2019F % 19.8% 13.8% 15.9% 12.2% 16.4% 15.4% ROA 2018F % 3.2% 3.7% 4.1% 2.3% 7.4% 5.4% 2019F % 2.6% 4.5% 4.7% 2.7% 7.7% 5.7% Margin (2018F) Gross margin % 19.6% 12.4% 16.0% 13.2% 25.2% 13.8% EBITDA margin % 16.7% 12.9% 16.5% 9.9% 26.8% 15.1% EBIT margin % 15.9% 11.1% 13.0% 9.6% 22.8% 11.1% Net margin % 7.9% 5.2% 7.1% 3.8% 15.4% 6.8% Valuation (2018F) P/E x 7.7 8.3 9.0 9.4 7.5 10.0 P/B x 1.7 1.0 1.3 1.0 1.2 1.5 EV/EBITDA x 10.7 5.1 4.8 6.8 5.4 6.4 Dividend yield % 1.0% 2.0% 1.2% 1.3% 3.2% 2.3% Source: Bloomberg, Bahana estimate and forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 3
9 January 2018
Exhibit 5. Global peers comparison Bloomberg CP TP Market cap EPS growth (%) PE (x) PB (x) EV/EBITDA (x) Div. yield (%) ROA (%) ROE (%) Gross margin (%) EBIT margin (%) Net margin (%) ticker (local) (USDmn) 17F 18F 19F 17F 18F 19F 17F 18F 19F 17F 18F 19F 17F 18F 19F 17F 18F 19F 17F 18F 19F 17F 18F 19F 17F 18F 19F 17F 18F 19F Indonesia construction companies Pembangunan Perumahan PTPP IJ 2,680 3,500 1,239 27.0 41.8 26.5 12.8 9.0 7.1 1.5 1.3 1.1 5.9 4.8 4.2 0.9 1.2 1.7 3.4 4.1 4.7 11.9 14.6 15.9 14.7 16.0 16.5 11.6 13.0 13.5 6.1 7.1 7.6 Wijaya Karya WIKA IJ 1,580 2,200 1,057 41.1 20.0 27.8 9.9 8.3 6.5 1.1 1.0 0.9 6.0 5.1 4.7 1.4 2.0 2.4 4.0 3.7 4.5 11.3 12.2 13.8 13.0 12.4 12.8 12.4 11.1 12.7 6.8 5.2 6.5 Waskita Karya WSKT IJ 2,300 3,500 2,329 87.9 25.8 6.5 9.7 7.7 7.2 2.2 1.7 1.4 11.6 10.7 11.1 0.5 1.0 1.3 3.2 3.2 2.6 22.8 22.7 19.8 19.6 19.6 20.1 16.1 15.9 16.4 8.2 7.9 6.8 Adhi Karya ADHI IJ 1,895 2,400 503 77.5 28.9 20.8 12.1 9.4 7.8 1.1 1.0 1.0 7.5 6.8 6.4 0.7 1.3 1.7 2.1 2.3 2.7 9.4 11.1 12.2 12.3 13.2 13.4 8.7 9.6 9.8 3.6 3.8 4.1 Wijaya Karya Beton WTON IJ 520 610 338 25.3 32.2 16.4 13.3 10.0 8.6 1.7 1.5 1.3 7.9 6.4 5.8 1.8 2.3 3.0 5.1 5.4 5.7 12.7 14.9 15.4 14.0 13.8 14.1 11.2 11.1 11.3 7.0 6.8 7.1 Waskita Beton Precast WSBP IJ 412 645 810 85.3 23.4 20.2 9.2 7.5 6.2 1.3 1.2 1.0 5.9 5.4 4.8 2.9 3.2 4.0 6.8 7.4 7.7 14.2 15.5 16.4 26.1 25.2 25.2 23.7 22.8 22.8 16.5 15.4 15.2 Total Bangun Persada TOTL IJ 665 169 11.4 9.2 8.7 9.0 8.2 7.7 2.2 2.0 1.8 4.8 4.4 4.2 6.7 7.0 7.6 7.8 7.6 7.4 24.6 24.0 23.5 18.1 18.0 17.6 9.6 9.1 8.7 9.0 8.8 8.6 Acset Indonusa ACST IJ 2,530 132 77.5 69.0 20.7 12.8 7.6 6.3 1.3 1.1 1.0 8.5 5.2 5.1 2.5 4.8 5.1 5.0 5.2 6.2 12.2 20.2 20.3 15.5 16.1 14.8 - - - 5.1 5.4 5.7 Weighted average 61.7 28.3 17.1 10.6 8.2 7.0 1.6 1.4 1.2 8.1 7.2 7.0 1.3 1.8 2.2 3.9 4.1 4.2 16.0 17.1 16.8 17.2 17.4 17.7 14.1 14.1 14.6 8.0 7.7 7.7
China construction companies - H Shares China Railway Group 390 HK 6 27,878 22.6 11.7 13.0 7.8 7.0 6.2 0.8 0.7 0.6 9.8 8.9 8.1 2.1 2.3 2.6 1.9 2.0 2.1 10.4 10.6 11.1 8.5 8.5 8.4 3.5 3.5 3.6 2.1 2.2 2.3 China Railway Construction Corp 1186 HK 9 23,060 11.2 11.7 11.9 6.8 6.1 5.4 0.7 0.7 0.6 8.1 7.3 6.7 2.4 2.6 2.9 2.1 2.1 2.2 11.2 11.4 11.6 8.8 8.7 8.7 3.6 3.7 3.8 2.3 2.4 2.5 China Communications Construction Co 1800 HK 9 29,761 13.9 12.5 13.6 6.8 6.0 5.3 0.7 0.7 0.6 10.6 9.7 8.9 2.9 3.2 3.7 2.3 2.4 2.6 11.2 11.5 11.9 13.9 14.0 14.3 7.0 7.2 7.2 4.1 4.2 4.4 China State Construction International Holdings 3311 HK 11 7,401 24.6 16.1 22.3 9.6 8.2 6.7 1.6 1.4 1.2 9.8 8.3 7.1 3.1 3.6 4.3 6.0 6.4 6.8 18.5 18.7 19.3 13.9 14.4 14.6 12.0 12.5 13.2 10.6 11.1 11.5 Metallurgical Corp of China 1618 HK 2 14,077 13.2 23.7 17.1 7.1 5.8 4.9 0.6 0.5 0.5 14.8 12.9 11.7 3.3 4.1 5.0 1.5 1.6 1.9 8.5 9.7 10.9 12.5 11.6 12.0 5.8 4.9 5.1 2.4 2.4 2.6 Sinopec Engineering Group Co 2386 HK 8 4,361 23.9 25.3 17.1 13.6 10.8 9.3 1.1 1.0 0.9 5.4 4.3 3.8 2.8 3.5 3.9 3.8 4.8 5.2 8.1 9.7 10.6 13.3 13.9 14.4 6.0 6.6 6.7 5.4 6.1 6.5 Weighted average 16.2 14.4 14.2 7.6 6.6 5.8 0.8 0.7 0.7 9.9 8.8 8.0 2.7 3.1 3.5 2.4 2.6 2.7 11.1 11.5 12.1 11.4 11.3 11.5 5.6 5.6 5.8 3.6 3.8 3.9
China construction companies - A Shares China Railway Group 601390 CH 9 27,858 24.2 11.1 12.1 13.4 12.0 10.7 1.3 1.2 1.1 9.6 8.8 8.1 1.2 1.4 1.5 1.9 2.0 2.1 10.2 10.5 10.8 9.3 9.2 9.3 3.6 3.5 3.6 2.1 2.2 2.3 China Railway Construction Corp 601186 CH 12 23,043 12.9 13.2 12.1 10.0 8.8 7.9 1.1 1.0 0.9 8.0 7.2 6.6 1.6 1.8 2.0 2.1 2.2 2.3 11.5 11.8 11.9 9.2 9.2 9.4 3.7 3.7 3.9 2.4 2.5 2.6 China Communications Construction Co 601800 CH 14 29,721 18.8 11.9 13.5 11.4 10.2 9.0 1.3 1.2 1.1 10.3 9.5 8.7 1.7 1.9 2.1 2.6 2.7 2.9 11.9 12.1 12.3 14.6 14.6 14.7 7.0 7.1 7.2 4.1 4.3 4.4 Metallurgical Corp of China 601618 CH 5 14,067 18.4 16.6 10.1 16.2 13.9 12.6 1.4 1.3 1.2 13.7 12.1 11.1 1.3 2.0 2.3 1.7 1.8 2.0 9.0 9.7 10.0 13.0 12.7 13.1 5.5 5.2 5.1 2.6 2.8 2.9 China State Construction Engineering Corp 601668 CH 10 44,049 18.2 12.9 12.6 8.4 7.4 6.6 1.4 1.2 1.0 7.6 6.7 6.2 2.6 3.1 3.4 2.9 2.9 3.2 16.4 16.3 15.7 10.2 10.1 10.4 6.4 6.4 6.2 3.2 3.2 3.3 Shanghai Tunnel Engineering Co 600820 CH 9 4,176 13.8 12.4 11.1 14.3 12.7 11.4 1.4 1.3 1.2 8.0 7.4 7.9 2.0 2.2 2.3 2.8 2.9 3.2 10.1 10.4 10.5 11.9 11.8 11.9 4.5 3.8 3.8 5.7 5.6 5.6 Shanghai Construction Group Co 600170 CH 4 5,213 14.8 19.6 4.3 14.1 11.8 11.3 1.4 1.3 1.2 - - - 3.2 9.6 9.8 1.4 1.4 1.5 11.2 12.9 14.5 10.4 10.4 10.3 2.6 2.6 2.6 1.6 1.6 1.7 Weighted average 30.8 13.8 12.4 11.8 10.3 9.2 1.4 1.2 1.1 8.9 8.0 7.4 1.9 2.4 2.6 2.4 2.5 2.7 12.5 12.8 12.9 11.6 11.5 11.7 5.6 5.6 5.6 3.4 3.5 3.6
China design companies JSTI Group 300284 CH 16 1,468 25.5 28.2 25.5 19.3 15.0 12.0 2.6 2.2 1.9 11.5 9.6 9.3 1.0 1.2 1.5 4.5 5.3 5.2 14.0 15.1 15.9 28.7 28.8 29.1 12.0 11.6 11.3 7.6 7.9 8.3 China Haisum Engineering Co 002116 CH 11 704 40.9 24.7 22.4 23.5 18.9 15.4 ------2.3 2.7 3.2 5.2 5.8 6.1 16.5 18.2 19.4 10.4 10.7 10.7 5.0 5.3 5.5 4.7 5.2 5.4 East China Engineering Science and Technology Co 002140 CH 11 763 ------Weighted average 22.6 20.0 18.1 15.3 12.0 9.7 1.3 1.1 0.9 5.7 4.8 4.6 1.0 1.3 1.5 3.5 4.0 4.0 10.9 11.9 12.6 16.8 17.0 17.1 7.2 7.1 7.0 4.9 5.2 5.5
Asian construction companies Daewoo Engineering & Construction Co 047040 KS 6,130 2,400 - (4.5) (1.2) 4.8 5.0 5.1 1.0 0.8 0.7 3.9 3.9 4.0 - - - 5.5 5.1 4.8 23.2 18.2 15.3 10.1 10.6 10.7 6.5 6.5 6.3 4.5 4.4 4.5 Hyundai Engineering & Construction Co 000720 KS 38,250 4,012 (13.5) 39.5 3.8 10.0 7.2 6.9 0.6 0.6 0.5 3.8 3.6 3.5 1.4 1.5 1.5 3.1 3.8 3.9 7.0 8.8 8.5 10.5 10.4 10.5 6.3 6.3 6.1 2.4 3.1 3.1 Daelim Industrial Co 000210 KS 84,400 2,767 105.6 (7.7) (1.1) 5.1 5.5 5.5 0.6 0.6 0.5 6.5 6.2 6.3 0.4 0.4 0.4 4.9 4.4 4.2 12.7 10.5 9.4 10.4 10.7 10.7 5.0 5.1 5.2 5.2 4.7 4.6 Singapore Technologies Engineering STE SP 3 7,822 - 9.6 10.5 21.3 19.5 17.6 4.7 4.5 4.3 14.2 13.2 12.6 4.4 4.7 4.9 5.8 6.3 6.6 22.0 23.6 24.9 19.9 20.2 20.7 7.9 8.5 8.7 7.2 7.6 7.9 Shimizu Corp 1803 JP 1,190 8,292 66.8 (12.8) 5.7 10.6 10.8 10.2 1.7 1.5 1.3 7.3 7.5 7.0 1.8 2.0 2.1 5.2 5.5 5.6 16.7 13.8 13.2 12.8 13.0 13.1 8.0 7.3 7.3 5.7 5.4 5.4 Gamuda GAM MK 5 3,043 (4.6) 25.4 16.4 18.3 15.9 13.7 1.7 1.5 1.4 24.3 18.9 16.3 2.5 2.5 2.6 4.8 5.0 5.3 11.7 12.0 12.2 17.2 24.3 22.8 23.4 18.4 17.4 23.8 18.7 17.7 Kajima Corp 1812 JP 1,108 10,353 45.0 5.1 (7.2) 11.9 10.4 11.2 2.1 1.8 1.6 6.6 6.5 6.6 1.6 1.9 2.0 5.7 6.1 5.5 18.9 18.0 14.6 13.0 13.5 12.9 8.1 8.0 7.2 5.4 6.0 5.3 Weighted average 39.7 63.9 5.1 17.6 12.0 11.3 2.0 1.8 1.7 9.3 8.6 8.1 2.0 2.2 2.3 4.8 5.1 5.1 15.6 14.6 13.9 14.1 14.8 14.7 8.2 7.8 7.6 6.8 6.5 6.4
US & Europe construction companies Vinci SA DG FP 88 62,848 6.2 10.5 8.5 18.8 17.0 15.7 2.8 2.6 2.4 10.6 10.0 9.5 2.6 2.9 3.1 3.8 4.2 4.6 15.2 15.6 15.6 19.9 20.1 29.0 11.3 11.6 11.9 6.5 7.0 7.3 ACS Actividades de Construccion y Servicios SA ACS SM 34 12,866 0.4 8.9 6.9 13.9 12.7 11.9 2.7 2.5 2.2 6.0 5.7 5.5 3.5 3.7 3.9 - - - 19.5 18.6 18.1 - - - 4.7 4.9 4.9 2.2 2.3 2.4 Boskalis Westminster BOKA 0 31 4,951 (3.1) 4.2 10.6 26.3 25.2 22.8 1.3 1.2 1.2 9.1 9.1 8.7 1.9 1.9 2.1 4.0 4.1 4.8 5.1 4.8 5.0 36.8 36.5 36.4 7.2 7.1 7.5 6.7 6.6 7.0 HOCHTIEF AG HOT GR 150 11,619 26.1 9.4 8.6 22.0 20.1 18.6 4.6 4.1 3.7 8.5 7.9 7.4 2.0 2.3 2.6 2.9 3.1 3.2 21.6 22.1 22.5 24.8 24.8 24.8 3.8 3.9 4.0 1.9 2.0 2.1 Skanska AB SKAB SS 170 8,758 (13.6) (15.9) 6.0 12.4 14.7 13.9 2.4 2.3 2.2 9.2 9.2 8.8 5.0 5.1 5.3 4.8 4.4 4.3 19.3 16.9 16.9 8.3 9.1 8.9 4.0 3.9 4.0 3.5 2.9 3.0 Atlas Copco AB ATCOA SS 369 53,771 27.3 11.4 8.6 25.6 23.0 21.2 7.3 6.4 5.5 15.1 13.9 13.0 1.9 2.1 2.2 14.8 15.8 16.5 30.6 30.0 28.4 40.7 41.5 41.5 21.4 21.9 20.5 15.4 16.0 16.4 Sandvik AB SAND SS 151 23,255 37.1 8.8 9.9 20.1 18.4 16.8 4.2 3.7 3.2 11.4 10.8 10.2 2.2 2.4 2.6 8.7 9.3 9.9 22.5 21.8 21.1 40.3 40.6 41.6 15.5 16.3 16.8 10.3 10.9 11.4 Fluor Corp FLR US 53 7,471 (34.7) 55.5 25.4 35.2 22.7 18.1 2.2 2.0 1.8 11.5 8.9 7.8 1.6 1.6 1.6 2.6 4.1 6.7 6.6 9.0 8.7 3.1 4.4 4.3 2.0 3.0 3.4 1.1 1.7 2.0 Weighted average 18.5 12.2 9.7 21.0 19.0 17.3 4.2 3.8 3.3 11.2 10.6 10.0 2.4 2.5 2.7 7.0 7.6 8.1 20.4 20.3 19.9 26.0 26.4 29.5 12.7 13.1 13.0 8.4 8.8 9.1
Indian construction NCC/India NJCC IN 132 1,160 - - 55.2 26.6 34.4 22.2 2.1 2.0 1.9 13.5 12.9 9.9 0.4 0.4 0.4 6.3 6.5 7.8 8.2 6.0 8.7 - - - 7.3 7.6 7.9 3.5 2.7 3.3 ABB India ABB IN 1,435 4,804 ------8.4 7.4 6.5 32.2 23.1 19.4 0.4 0.5 0.6 9.1 11.7 12.3 13.7 17.6 19.0 - - - 7.5 9.2 9.7 - - - Larsen & Toubro LT IN 1,315 29,101 20.9 11.1 14.5 34.9 26.9 23.5 3.8 3.3 2.9 22.7 20.9 17.8 0.9 1.2 1.3 3.2 3.6 3.9 11.4 13.1 13.7 28.4 24.1 26.0 8.9 9.1 9.6 4.8 5.7 5.8 Weighted average 29.1 8.9 13.4 28.9 22.7 19.6 4.3 3.7 3.2 23.0 20.3 17.2 0.8 1.0 1.2 4.0 4.7 5.0 11.2 13.1 13.8 22.8 19.4 21.0 8.4 8.8 9.3 4.0 4.7 4.8
Total weighted average 24.6 17.6 11.3 15.8 13.5 12.2 2.5 2.2 2.0 10.8 9.9 9.1 2.1 2.5 2.7 4.3 4.7 5.0 15.2 15.4 15.4 17.6 17.6 18.8 8.6 8.7 8.7 5.6 5.8 6.0 Source: Bloomberg, Company, Bahana forecasts Note: Pricing as of close 5 January 2018
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 4
9 January 2018
Initiate coverage with OVERWEIGHT rating
We initiate coverage of the Indonesia construction sector with an We initiate coverage of the Indonesia OVERWEIGHT rating, highlighting Waskita Karya’s turnkey payments and construction sector with an OVERWEIGHT possible asset divestment of its subsidiary, Waskita Toll Road (WTR). Despite rating, highlighting Waskita Karya’s turnkey delivering strong earnings growth and a higher-than-expected margin, the payments and possible asset divestment of its market seems reluctant to reward the SOE contractors’ achievements, subsidiary, Waskita Toll Road (WTR) mainly on the back of deteriorating operating cash flow (OCF) and higher balance sheet risk. Sector valuation has derated to -2STD of its 5-year average PER; with all SOE contractors currently trade at an attractive single- digit PER. Given we believe the expectations have hit their nadir, we think a possible surprise from the two afore-mentioned factors mentioned above might renew the interest towards the sector, and thus we believe this is the right time to revisit the sector.
SOE construction stocks in review: Solid earnings with deteriorating OCF and higher balance-sheet risk
The government’s infrastructure focus has pushed new contracts bookings The government’s infrastructure focus has and earnings to a record level, as shown in Exhibits 6 and 8 below. By the pushed new contracts bookings and earnings end of 2017F, the total aggregate order book of the four-listed SOE to a record level contractors will reach close to IDR405tn, 2.5x higher than 2013’s order book of IDR116tn. Although a chunk of this has not yet translated into revenues, they are expected to book 2017F aggregate earnings of IDR6.9tn, 2.9x higher than 2013’s aggregate earnings of IR1.8tn.
Despite these record earnings, the share prices of the listed SOE contractors Despite these record earnings, the share prices have collapsed since their peak around mid-2016 as both domestic and of the listed SOE contractors have collapsed foreign investors have turned their eyes towards SOE contractors’ worsening since their peak around mid-2016 as both operating cash flow positions (Exhibit 12). This was mainly due to (1) domestic and foreign investors have turned turnkey projects – resulting in higher receivable days and (2) their decisions their eyes towards SOE contractors’ worsening to start directly investing in projects to secure contracts, in our view. We operating cash flow positions demonstrate the cause of operating cash flow deterioration through Exhibit 13. In addition, as a significant part of their capital was allocated away for direct investment, facing a rapidly increasing order book, the SOE contractors were required to raise additional debt funding for working capital, exposing themselves into higher balance-sheet risk. Normally, contractors would need to set aside 20% of a contract budget for working capital, which is usually funded through short-term loans from domestic banks.
Exhibit 6. Soaring aggregate orderbook … Exhibit 7. … has supported SOE contractors’ revenue 450 70% 100 45% Carry over New contract PTPP revenue WSKT revenue 400 % y-y growth (RHS) 90 40% 60% WIKA revenue 350 80 ADHI revenue 35% 50% 70 % y-y growth (RHS)
300 195 30% 60 250 40% 25%
50 IDRtn IDRtn 200 20% 174 174 30% 40 150 15% 30
98 98 20% 70 70
100 209 20 10% 61 61
60 60 10% 48 48
50 116 10 5%
81 81
65 65
54 54 42 42
- 34 0% - 0%
2011 2012 2013 2014 2015 2016
2014 2011 2012 2013 2015 2016 2017F 2017F Source: Company data, Bahana Source: Company data, Bahana
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Exhibit 8. SOE contractors’ record earnings … Exhibit 9. … but at the expense of longer receivable …
7 PTPP net profit 70% 90 PTPP receivable WSKT receivable WIKA receivable ADHI receivable WSKT net profit 80 6 60% WIKA net profit 70 13 5 ADHI net profit 50% 60 % y-y growth (RHS) 9 4 40% 50 10
7 IDRtn IDRtn 40 3 30% 36
30 6 2 20% 25 20 6 5 5 4 1 10% 3 11 10 6 7 19 12 6 7 9
- 0% 0
2011 2012 2013 2014 2015 2016
2011 2012 2013 2014 2015 2016 2017F 2017F Source: Company data, Bahana Source: Company data, Bahana
Exhibit 10. … and rising debt Exhibit 11. SOE contractors’ total receivable days
70 ADHI debt WIKA debt 450 WSKT debt PTPP debt 400 60 3 8 350 50 300 40 3 250
7 days IDRtn 30 42 200 150 20 25 2 4 100 WKST PTPP WIKA 10 8 50 ADHI Aggregate 8 4 7
- -
2014 2015 2011 2012 2013 2016
2011 2014 2012 2013 2015 2016 2017F 2017F Source: Company data, Bahana Source: Company data, Bahana
Exhibit 12. SOE contractors’ operating cash flow (OCF) position 4,000 3,000 2,000 1,000
n - b
IDR (1,000) (2,000) (3,000) (4,000)
(5,000)
4Q15 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 PTPP ADHI WSKT WIKA Source: Company data, Bahana
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Exhibit 13. Explanation behind SOE contractors’ deteriorating OCF
Execution of capital Securing new contract recycling is not smooth as growth expected
Direct investments in Working capital need is Deteriorating CF from Higher receivables projects compromised operations
Part of capital is being Gross amount Account allocated away for those due from receivable direct investments customers
Lower working capital More stretched balance for construction Higher financing expense sheet business
Need for extra financing Gearing up
Source: Bahana
Where is the sector headed from here?
(1) Orderbook will continue to grow
For the next three years, we still expect the orderbook of SOE contractors We still expect the orderbook of SOE to continue to grow at a 13% CAGR 2017/20F, contrary to market perception contractors to continue to grow at a 13% CAGR that new contracts might be peaking. We think the worry is understandable 2017/20F as the big-four SOE contractors booked 41% CAGR new contracts growth during the 2014/17F period, 3x higher than the 2011/14 period, thanks to the current administration’s infrastructure focus. However, based on our bottom-up project tracker on the government’s national projects, we estimate that there are at least another 1.0x worth of infrastructure projects currently in preparation and in the tender process than projects awarded in the past 3 years (Exhibit 14). Our findings are pretty much in line with live data from the Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) – Exhibit 19 and 20. In addition, we think railway, seaports, and power plants will drive the new contracts going forward.
Exhibit 14. More infrastructure projects to be awarded in USDbn Preparation Ongoing tender Contract granted Total Airport - - 1.8 1.8 Power plant 13.2 5.2 11.6 29.9 Railway 29.1 7.2 22.2 58.4 Seaport 3.5 4.9 2.6 10.9 Toll road 4.9 3.3 30.1 38.3 Total 50.6 20.5 68.3 139.4
No of projects Preparation Ongoing tender Contract granted Total Airport 2 - 10 12 Power plant 27 12 32 71 Railway 22 3 24 49 Seaport 10 3 9 22 Toll road 7 3 41 51 Total 68 21 116 205 Source: KPPIP, Bahana, Various media sources
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Exhibit 15. Infra project progress tracker per sector – Exhibit 16. Power plant, railway and seaport will up to USD92bn worth of upcoming projects dominate infra tender going forward 70.0 100% 90% 60.0 24% 80% 39% 38% 49% 50.0 70% 22.2 60% 79% 40.0 12% 17% 45% 50% 100% 7.2 15% USDbn 30.0 40% 11.6 30.1 30% 20.0 50% 44% 5.2 29.1 20% 32% 9% 36% 10.0 2.6 10% 13.2 4.9 3.3 13% 4.9 - 1.8 3.5 0% Airport Power Railway Seaport Toll road Airport Power Railway Seaport Toll road Total plant plant Preparation Ongoing tender Contract granted Preparation Ongoing tender Contract granted
Source: Various media sources, Bahana Source: Various media sources, Bahana
Exhibit 17. Infra project progress tracker per sector Exhibit 18. There are 58% of planned infra project that – up to 117 upcoming projects have not yet granted 80 100%
70 90% 80% 41% 60 45% 49% 57% 32 70% 50 60% 83% 80% 40 50% 14% 24 17% 6%
projects 12 40% 30 41 10% 3 30% 20 45% 45% 9 20% 38% 27 6% 33% 22 3 10 3 10% 10 17% 14% 10 7 - 0% Airport Power Railway Seaport Toll road Airport Power Railway Seaport Toll road Total plant plant Preparation Ongoing tender Contract granted Preparation Ongoing tender Contract granted
Source: Various media sources, Bahana Source: Various media sources, Bahana
Exhibit 19. Progress of strategic national infra Exhibit 20. Progress of 35,000 MW power plant projects – as of 9M17 projects – as of 9M17 Transaction Completed; Operating 5% 2% 3% Procurement Planning 11% 6%
Construction ; 42% Preparation Construction 40% 53%
Signed PPA; 38%
Source: KPPIP, Bahana Source: KPPIP, Bahana
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Moreover, we believe Indonesia is still at the early stage of the infrastructure We believe Indonesia is still at the early stage cycle considering that a comparison of public capital stocks between of the infrastructure cycle considering that a Indonesia and emerging markets and developing economies (EMDEs) comparison of public capital stocks between illustrates Indonesia’s large infrastructure deficit. In per capita terms, based Indonesia and emerging markets and on tedata from the International Monetary Fund (IMF), Indonesia’s public developing economies (EMDEs) illustrates capital stock is estimated at around USD3,900 – only about a third of the Indonesia’s large infrastructure deficit average for EMDEs and about an eighth of the corresponding average for advanced countries. In absolute terms, we estimate the gap in infrastructure assets between Indonesia and other major EMDEs stood at about USD1.5tn. This figure would be even higher if it accounted for additional infrastructure investments that Indonesia will need to enable higher economic growth. For a more-detailed discussion on this topic, please refer to our “Indonesia Infrastructure: Reform is on progress” section.
In addition, an analysis done by the World Bank in 2014 (in its report titled “Indonesia: Avoiding the trap”) found out that Indonesia had lost >1% of additional growth due to under-investment in the infrastructure sector. The World Bank further highlighted that Indonesia’s core infrastructure stock, such as road networks, ports, electricity, and telecommunication facilities, had not kept pace with economic growth. In real terms, the infrastructure stock grew by only 3% annually during 2001/11, against a real GDP growth of 5.3%. The slow growth in the infrastructure capital stock, in a context of high economic and vehicle fleet growth, contributes to serious major gaps, congestion problems, and poor logistic performance, seriously undermining productivity growth, competitiveness and poverty-reduction efforts. Assuming a causal relationship between changes in infrastructure capital stock and changes in output, had the growth rate in infrastructure capital stock stood at 5% instead of 3%, real GDP growth would have been 5.8%, a 50bps difference. In addition, for more-detailed discussion on the impact of infrastructure investment to the economy, please refer to our “Infrastructure: Cornerstone for growth” section.
Exhibit 21. Public capital stock gap between Indonesia and others 25,000
20,000
15,000
10,000
5,000
- Gapbetween Indoand others
(5,000)
2005 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2008 2011 2014 Developing Emerging Advanced Emerging and developing (EMDE) Source: IMF, World Bank, Bahana
In all, we believe that strong order book will give assurance regarding SOE At this current burn rate, orderbook backlog of contractors’ revenue and earnings going forward, as shown in Exhibit 25-27. SOE contractors could last for 3-4 years At the current burn rate, the order-book backlog of SOE contractors could last for 3-4 years.
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Exhibit 22. Orderbook to grow at 13% CAGR 17/20F Exhibit 23. … securing SOE contractors’ revenue … 700 70% 180 50% Carry over New contract PTPP revenue WSKT revenue % y-y growth (RHS) 160 45% 600 60% WIKA revenue 140 ADHI revenue 40% 500 50% % y-y growth (RHS) 35%
120 218 218
199 199 30% 400 40% 100
182 182 25% IDRtn IDRtn 80
300 195 30% 20% 60
200 20% 15%
174 174 362 362
331 331 40
293 293 10%
98 98 70 70
100 209 10% 61 61 20
60 60 5%
48 48
116 116
81 81
65 65
54 54 42 42
- 34 0% - 0%
2011 2012 2013 2014 2015 2016
2011 2012 2013 2014 2015 2016
2019F 2017F 2018F 2020F
2020F 2018F 2019F 2017F Source: Company data, Bahana estimates Source: Company data, Bahana estimates
Exhibit 24. … and earnings … Exhibit 25. while OCF to improve going forward … 12 PTPP net profit 70% 50 WSKT net profit 40 WIKA net profit 60% 10 30 ADHI net profit 20 % y-y growth (RHS) 50% 8 10 40% -
6 IDRtn (10) IDRtn 30% (20) 4 20% (30) (40) 2 10% (50)
- 0%
2014 2012 2013 2015 2016
2017F 2018F 2019F 2020F
2011 2012 2013 2014 2015 2016
2019F 2020F 2018F 2017F Operating cash flow Investing cash flow Financing cash flow
Source: Company data, Bahana estimates Source: Company data, Bahana estimates
Exhibit 26. … given strong earnings … Exhibit 27. … and peaking receivable days
40 OCF breakdown 450 30 400 20 350 10 300 -
250 IDRtn (10) days 200 (20) 150 (30) 100 WKST PTPP WIKA (40)
50 ADHI Aggregate
2014 2012 2013 2015 2016
2018F 2019F 2020F 2017F - Net profit Depreciation
Changes in WC: receivables Changes in WC: Inventories
2015 2016 2011 2012 2013 2014
2017F 2018F 2020F Changes in WC: payables Others 2019F Source: Company data, Bahana estimates Source: Company data, Bahana estimates
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(1) Improving OCF
Going forward, we expect aggregate big-four SOE contractors’ OCF to start We expect aggregate big-four SOE contractors’ showing positive numbers from 2018F (Exhibit 26), mainly on our OCF to start showing positive numbers from expectation that (1) WSKT will receive turnkey payments worth IDR16.1tn 2018F, mainly on our expectation that (1) this year and (2) SOE contractors’ 2018/19F receivable days will remain flat WSKT will receive turnkey payments worth from 2017F. Key downside risks to our improving OCF thesis are (1) WSKT IDR16.1tn this year and (2) SOE contractors’ not receiving its expected turnkey payments and (2) SOE contractors 2018/19F receivable days will remain flat from aggressively taking on more turnkey projects in the future to accelerate the 2017F government’s infrastructure programs prior to the election. We provide analysis on the impact of higher-than-expected receivable positions to each of the SOE contractor’s OCF in the company section.
(2) Leverage will remain elevated to support working capital and investment, although at a more moderate pace
We believe aggregate SOE contractors’ leverage position will remain elevated before peaking in 2020F (Exhibits 28 and 29). This is mainly due to WSKT’s increasing debt position as we have not yet priced in its toll-road divestments into our financial forecasts pending clarity on the scheme. As a frame of reference, based on our bottom-up analysis on its funding needs, WSKT needs to seek funding for close to IDR70tn worth of toll-road investments during 2017/19F. Please refer to WSKT section “Capital recycling is on its way” for more details. In all, we expect aggregate SOE contractors’ net gearing position to peak at close to 1x in 2019F, in line with WSKT’s peak capex cycle. This also implies that another round of state capital injection may not be needed at least until 2020F
Exhibit 28. Debt will remain elevated to support Exhibit 29. Net gearing to peak at close to 1x in 2019F, working capital and investment; mainly from WSKT in line with WSKT’s peak capex cycle
120 ADHI debt WIKA debt 800% 1.0 WSKT debt PTPP debt 700% 100 0.8 5 5 600% 10 10 0.6 80 500% 5
400% 0.4 x 60 11
IDRtn 8 300% 69 71 0.2 40 3 7 49 200% 42 - 20 25 100% 42 8 0% (0.2) 8 9 9 9
- 4 7
2013 2015 2011 2012 2014 2016
2017F 2019F 2018F 2020F
2015 2016 2011 2012 2013 2014
2017F 2019F 2020F 2018F Interest coverage Net gearing (RHS)
Source: Company data, Bahana estimates Source: Company data, Bahana estimates
(1) ROEs will continue to climb closer to a level prior to state equity injection
Supported by strong profitability and improving equity multiplier and asset We expect aggregate SOE contractors’ ROE to turnover, we expect aggregate SOE contractors’ ROE to climb from its low climb from its low 10.8% in 2016 to 10.8% in 2016 to 14.9%/16.3%/16.3% in 2017-19F, closer to its peak of 14.9%/16.3%/16.3% in 2017-19F 20%, prior to the state equity injection.
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Exhibit 30. Aggregate ROA vs. ROE 25% 5%
20% 4%
15% 3%
10% 2%
5% 1%
0% 0%
2013 2011 2012 2014 2015 2016
2020F 2017F 2018F 2019F ROE ROA (RHS)
Source: Company data, Bahana estimates
Exhibit 31. Aggregate margins Exhibit 32. Aggregate ROA vs. asset turnover 20% 4.5% 1.2 18% 4.0% 16% 1.0 3.5% 14% 3.0% 0.8 12% 10% 2.5% 0.6 x 8% 2.0% 6% 1.5% 0.4 4% 1.0% 2% 0.2 0.5% 0%
0.0% -
2013 2011 2012 2014 2015 2016
2017F 2018F 2019F 2020F
2016 2011 2012 2013 2014 2015
2020F 2018F 2019F Gross margin Net margin 2017F EBIT margin EBITDA margin ROA Asset tunover (RHS)
Source: Company data, Bahana estimates Source: Company data, Bahana estimates
Will funding issues slow down infra execution progress?
At this moment, the market is concerned that SOE contractors’ ability to Based on our foreign loans tracker, we raise funding from banks will continue to reduce due to rules on minimum estimate 40% of USD86bn worth of foreign loan-to-deposit ratios (LDR) and loan-to-funding ratios (LFR) along with loan commitment has been disbursed legal lending limitations (LLL) in providing maximum loans to each company (30% of total capital for infrastructure projects). Although this might put pressure on SOE contractors to diversify their lending base, which was previously dominated by SOE banks (BBNI and BMRI), we believe funding concerns will be alleviated as more foreign loans get approved. Late last year, we noted two key developments on the funding side that might give some relief to investors’ funding concern: (1) WSKT’s IDR5.1tn syndicated loan from a group of nine banks led by Sumitomo Mitsui Banking Corporation (SMCB) as sole mandated lead arranger and book-runner; and (2) financial closure of Greater Jakarta LRT project. Based on our foreign loans tracker, we estimate 40% of USD86bn worth of foreign loan commitments has been disbursed (Exhibit 33-35).
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Exhibit 33. USD86bn worth of foreign loan Exhibit 34. Origin of the USD34.4bn disbursed foreign commitment – 40% of it has been disbursed loans for infrastructure projects 60 Total: USD34.4bn 0.3 50 0.1 Others; 5.1 6% 8.2 40
9.0 2.2 30 International
8.1 ; 23% Japan; 44% USDbn
20 15.1 29.0 10 9.1 China; 26% - Not-yet disbursed Disbursed China Japan International Europe Others Australia
Source: KPPIP, Bahana Source: KPPIP, Bahana
Exhibit 35. Origin of USD51.6bn undisbursed foreign Exhibit 36. A third of pension fund assets are invested loan for infrastructure projects in bank deposits with relatively short-term gains Land and Others; 1% Others; 4% Total: USD51.6bn buildings; 6% Europe; Mutual fund; 10% 6% Deposit and savings; 28% International ; 16% Shares; 12%
China; 56%
Japan; 17% Bond and Government sukuk; 22% bond; 23%
Source: KPPIP, Bahana Source: KPPIP, Bahana
Moreover, increasing turnkey projects as well as higher investment capex has led SOE contractors to start tapping long-term funding instruments such as medium-term notes and bonds. A list of recent bond offerings is provided in Exhibit 37.
In addition, we believe institutional investors (pension funds, social security We believe institutional investors (pension firms, and life insurance companies) with longer-term liabilities are well funds, social security firms, and life insurance positioned to make infrastructure investments. To put this into perspective, companies) with longer-term liabilities are well together, Indonesia’s social security funds, private pension funds, insurance positioned to make infrastructure investments industry and collective investments amount to IDR1,400tn (around 12.3% of GDP) or USD100bn, according to IMF estimates. Moreover, most assets of institutional investors are invested conservatively with a relatively short- term perspective. For example, nearly 30% of pension fund assets are invested in bank deposits (Exhibit 36).
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Exhibit 37. Bond issuance by Indonesia construction companies Bond issuer Sector Issue Date Maturity Length (years) Coupon (%) Size (IDRbn) PEFINDO rating Moreover, increasing turnkey projects as well Adhi Karya Infrastructure Jul-12 Jul-19 7.0 9.8% 250 idA- Adhi Karya Infrastructure Mar-13 Mar-18 5.0 8.1% 125 idA- as higher investment capex has led SOE Adhi Karya Infrastructure Mar-13 Mar-18 5.0 8.1% 125 idA- Adhi Karya Infrastructure Mar-13 Mar-20 7.0 8.5% 500 idA- contractors to start tapping long-term funding Pembangunan Perumahan Infrastructure Mar-13 Mar-18 5.0 8.4% 700 idA+ instruments such as medium-term notes and Hutama Karya Persero Infrastructure Jun-13 Jun-18 5.0 9.1% 290 idA- Hutama Karya Persero Infrastructure Jun-13 Jun-20 7.0 9.5% 325 idA- bonds Pembangunan Perumahan Infrastructure Feb-15 Feb-20 5.0 10.2% 300 - Waskita Karya Infrastructure Oct-15 Oct-18 3.0 10.4% 350 - Waskita Karya Infrastructure Oct-15 Oct-20 5.0 11.1% 1,150 idA- Wijaya Karya Realty Infrastructure May-16 May-19 3.0 12.3% 100 idBBB+ Wijaya Karya Realty Infrastructure May-16 May-19 3.0 12.3% 150 idBBB+ Waskita Karya Infrastructure Jun-16 Jun-19 3.0 9.3% 2,000 idA- PP Properti Infrastructure Jul-16 Jul-21 5.0 9.9% 400 idBBB PP Properti Infrastructure Jul-16 Jul-19 3.0 9.2% 200 idBBB Waskita Karya Infrastructure Sep-16 Sep-21 5.0 8.5% 900 idA- PP Properti Infrastructure Dec-16 Dec-19 3.0 10.0% 100 - Hutama Karya Persero Infrastructure Dec-16 Dec-26 10.0 8.6% 1,000 idAAA Waskita Karya Infrastructure Feb-17 Feb-22 5.0 9.0% 910 idA- Waskita Karya Infrastructure Feb-17 Feb-20 3.0 8.5% 747 idA- Hutama Karya Persero Infrastructure Jun-17 Jun-27 10.0 8.1% 1,968 idAAA Adhi Karya Infrastructure Jun-17 Jun-22 5.0 9.3% 2,997 idA- PP Properti Infrastructure Aug-17 Aug-20 3.0 10.0% 287 - PP Properti Infrastructure Sep-17 Sep-20 3.0 10.0% 250 - Hutama Karya Persero Infrastructure Sep-17 Sep-22 5.0 7.8% 1,165 idAAA Hutama Karya Persero Infrastructure Sep-17 Sep-27 10.0 8.4% 2,367 idAAA PP Properti Infrastructure Sep-17 Sep-20 3.0 10.0% 50 - Adhi Persada Properti Infrastructure Oct-17 Oct-20 3.0 10.5% 625 idBBB Waskita Karya Infrastructure Oct-17 Oct-20 3.0 8.0% 1,369 - Waskita Karya Infrastructure Oct-17 Oct-22 5.0 8.5% 1,631 - PP Properti Infrastructure Oct-17 Oct-20 3.0 10.2% 200 - Wijaya Karya Realty Infrastructure Oct-17 Oct-20 3.0 9.8% 500 - PP Properti Infrastructure Nov-17 Nov-20 3.0 9.8% 213 - Waskita Toll Road Infrastructure Nov-17 Nov-18 1.0 10.4% 786 - Wijaya Karya Realty Infrastructure Nov-17 Nov-20 3.0 10.4% 250 - PP Properti Infrastructure Nov-17 Nov-20 3.0 9.8% 200 - Total 36 projects 5.4 9.0% 25,480 Source: Bloomberg, Bahana
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Focusing on capital creation
While attaining new contracts is important, we think the market has turned Focusing on companies with capital creation its focus from new contract attainment to capital creation and thus SOE implies that investors need to watch out for contractors that are able to recycle their capital shall outperform their peers three main factors: (1) receivable collections going forward. The other implication is that the winner could bid and go after outlook (working capital), (2) leverage more projects if they are able to churn its balance sheet, thus moving ahead capacity, and (3) marginally improving FCF of the curve as compared to peers. In all, focusing on companies with capital creation implies that investors need to watch out for three main factors: (1) receivable collections outlook (working capital), (2) leverage capacity, and (3) marginally improving FCF. Our pecking order for stock selection is WSKT > WIKA > PTPP > ADHI. For our financial forecasts, please refer to the company section of this report.
Attractive sector valuation, suggesting limited downside to the share price: From a valuation perspective, the sector has de-rated significantly from a peak of +2STD to -2STD of its five-year average PER, suggesting limited downside to the SOE contractors’ share prices.
WSKT is our top pick: WSKT is our top pick within the Indonesia WSKT is our top pick within Indonesia construction space given the company could be the biggest operating cash construction space given the company could be flow (OCF) turnaround candidate. We have priced in IDR16.1tn worth of the biggest operating cash flow (OCF) turnkey payments (IDR10tn from LRT South Sumatra and IDR6.1tn from turnaround candidate Sumatra Transmission line), resulting in lower receivables, into our 2018F financial forecasts. We view the turnkey payments from WTR could only be realized once the asset divestment is fully executed. Based on our discussion with bidders, there is a valuation gap between what management is asking and what the bidders are willing to pay. Therefore, we believe the likely divestment scenario is through an IPO of Trans Java, which could likely bring WTR fresh cash of IDR4.0-4.9tn assuming the deal happens at 1.5-1.8x PBV. Initiate with a BUY rating with a TP of IDR3,500. Rising tide lifts all boats: We believe the likely improved sentiment from We believe the likely improved sentiment from WSKT’s improving OCF will also benefit the other SOE contractors as well. WSKT’s improving OCF will also benefit the We like WIKA for its (1) heavy involvement in national railway projects, other SOE contractors as well which could groom the company to be a preferred SOE contractor of choice for future railway projects, (2) strong corporate governance and (3) relatively healthier balance sheet. We are of the view that WIKA will be able to secure more infrastructure contracts with the railway sector being the key driver for its future growth. Looking back, WIKA demonstrated a high success rate in winning railway contracts: (1) Jakarta-Bandung HSR and (2) Jakarta LRT; in addition to its participation as the sub-contractor for Jakarta MRT Phase-1. Initiate with a BUY with a TP of IDR2,200. BUY ratings on PTPP and ADHI: We also have BUY ratings on PTPP and ADHI with TPs of IDR3,500 and IDR2,400 respectively. PTPP has (1) a strong position in the ports and power plants segment, (2) strong balance sheet and cash flow generation, and (3) margin improvement outlook, counting on its newly-listed subsidiary PP Presisi (PPRE). Considering that there is clarity on the ADHI’s role in the Greater Jakarta project and syndicated loan arrangement for Kereta Api Indonesia (KAI) has been made, we think the overhang on the stock should disappear going forward.
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COMPANY SECTION
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Waskita Karya
Capital recycling is on its way
Initiating coverage with a BUY rating and TP of IDR3,500: WSKT is Exhibit 38. WSKT key ratios and statistics our top pick within the Indonesia construction space given the company Company information Bloomberg/ Reuters code WSKT IJ/WSKT.JK could be the biggest operating cash flow (OCF) turnaround candidate in light Target price (IDR/share) 3,500 of (1) turnkey project payments and (2) possible asset divestment of its Upside/downside (%) 52% Current price (IDR/share) 2,300 subsidiary, Waskita Toll Road (WTR). Given imminent turnkey payments, 52W range (IDR/share) 1,775-2,680 resulting in positive OCF, we view the risks on WSKT are now skewed to the Share outstanding (mn shares) 13,574 Market capitalization (IDRbn) 31,220 upside; hence we initiate coverage on WSKT with a BUY rating and 12-month EV, current (IDRbn) 61,734 target price (TP) of IDR3,500/share, based on 11.7x PER on its 2018F EPS. 3M avg daily turnover (IDRbn) 51 Fiscal Year Ending Dec. 31 16A 17F 18F 19F Counting on turnkey payments: Based on our understanding, there could Bahana EPS (IDR) 126 237 298 318 Consensus EPS (IDR) 126 240 269 296 be up to IDR38.5tn worth of WSKT turnkey projects to be paid in 2018F Revenue (IDRbn) 23,788 39,417 51,564 63,009 (Exhibit 57). However, we take this with a pinch of salt as we only priced in EBITDA (IDRbn) 3,377 6,654 8,623 10,821 Net profit (IDRbn) 1,713 3,219 4,050 4,313 IDR16.1tn of turnkey payments (IDR10tn from LRT South Sumatera and Ratios: IDR6.1tn from Sumatra Transmission Line) into our 2018F financial PER (x) 18.2 9.7 7.7 7.2 PBV (x) 2.8 2.2 1.7 1.4 forecasts. We view that the rest of any turnkey payments (from WTR) could ROE (%) 15.5% 22.8% 22.7% 19.8% only be realized once the asset divestment is fully executed. In addition, EV/EBITDA (x) 18.3 9.3 7.2 5.7 Dividend yield (%) 0.7% 0.5% 1.0% 1.3% under our currently assumed scenario, even without divesting its toll road Debt to equity (%) 150.5% 156.0% 130.1% 146.4% Net debt to equity (%) 87.0% 123.1% 108.1% 137.3% assets, the company would still be able to deliver positive OCF for the first Source: Company data, Bloomberg, Bahana estimates time since 2015.
Asset divestment to sweeten up our constructive view on WSKT: After turnkey payments from the two afore-mentioned projects, we view that the next round of its capital recycling strategy that will fully revive investors’ sentiment toward WSKT is through asset divestment. However, we have not taken into consideration the divestment of WTR into our forecasts yet. Currently, there are still a few possible scenarios that WSKT is pursuing: (1) individual or bundle sale of its toll-road assets to direct investors, (2) combining its Trans-Java toll-road sections together with JSMR’s section, followed by an IPO, (3) IPO of WTR, and (4) rights issue of WTR. Among the alternatives, we think the first and second scenarios are the ones most likely to happen. We analyse the possible proceeds for each of WTR’s toll-road assets that might be divested under the first scenario in Exhibit 63. Based on our discussion with bidders, there is a valuation gap between what management is asking and what the bidders are willing to pay. Therefore, we believe the likely divestment scenario is through IPO of Trans Java, which could likely bring WTR fresh cash of IDR4.0-4.9tn assuming the deal happens at 1.5-1.8x PBV (Exhibit 64).
Leverage remains below management target and debt covenants: We believe much of WSKT’s underperformance versus the JCI in the past two years was due to market concerns on funding visibility given its highly geared projected balance sheet and chunky capex plans. Post the turnkey payments outlined above, we expect WSKT will be able to maintain its 2019F debt-to-equity position at 1.5x, well below management’s target and its debt covenant requirements of <2.0x and <2.3x respectively.
Current WSKT share price implies no turnkey payments or asset divestments: We provide a sensitivity analysis on WSKT financials if the company does not receive our expected turnkey payments in Exhibit 65. If these turnkey payments do not materialize, we estimate WSKT will need to raise additional debt of IDR15tn and thus need to incur higher interest expense, which will bring our WSKT’s 2018/19F earnings forecasts lower by 24%. This reflects that current WSKT share price implies no turnkey payment nor asset divestment and thus has priced in downside risks for our expectation.
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 17
9 January 2018
FINANCIAL SUMMARY
Profit and Loss Statement Cash Flow Statement YE Dec. 31 (IDRbn) YE Dec. 31 (IDRbn) 2014 2015 2016 2017F 2018F 2019F 2020F 2014 2015 2016 2017F 2018F 2019F 2020F Construction 9,484 12,052 22,373 35,651 46,335 56,385 61,278 Net profit 512 1,048 1,713 3,219 4,050 4,313 4,886 Precast 803 2,069 1,148 3,211 4,245 5,168 6,035 Depreciation 86 143 198 315 413 504 553 Toll road - 32 218 355 516 756 969 Changes in working capital (509) 2,501 (9,999) (4,042) 8,960 (4,011) (4,796) Property - - 45 158 413 630 830 Cash flow from operations 89 3,691 (8,088) (507) 13,423 806 643 Energy - - 2 39 52 63 69 Buildings and equipment rental 0 1 1 4 5 6 7 Investment in JV and associates (392) (837) (499) (4,430) (4,748) (2,933) (880) Net sales 10,287 14,153 23,788 39,417 51,564 63,009 69,187 Investment in properties 15 (260) 207 - - - - Fixed assets (292) (1,444) (1,550) (1,761) (2,304) (2,816) (3,092) Gross profit including JO 1,306 1,921 3,968 7,718 10,119 12,648 13,981 Others (842) (9,517) (2,848) (12,674) (15,178) (19,234) 548 Operating expenses (420) (518) (788) (1,380) (1,908) (2,331) (2,560) Cash flow from investing (1,511) (12,058) (4,691) (18,865) (22,230) (24,983) (3,424) Operating income 886 1,403 3,180 6,339 8,211 10,317 11,421 Short & LT debt 1,540 4,872 17,205 16,708 7,284 19,294 2,334 Interest income 43 73 187 575 540 275 260 Capital stock 59 5,385 1 - - - - Financing expenses (184) (340) (983) (2,205) (2,560) (3,607) (3,724) Retained earnings (121) (186) (195) (171) (322) (405) (431) Other income/ (expenses) 20 262 96 483 417 450 442 Others 500 2,131 910 1,033 1,302 1,203 652 Pretax profit 766 1,398 2,480 5,192 6,609 7,435 8,399 Cash flow from financing 1,978 12,202 17,921 17,570 8,264 20,092 2,555 - Income taxes (254) (350) (667) (1,183) (1,547) (1,890) (2,076) Net cash flow 556 3,836 5,143 (1,802) (543) (4,084) (226) Minority interest (0) (0) 100 791 1,011 1,231 1,438 Beginning balance 1,120 1,675 5,511 10,654 8,851 8,309 4,225 Net profit 512 1,048 1,713 3,219 4,050 4,313 4,886 Ending balance 1,675 5,511 10,654 8,851 8,309 4,225 3,999
Balance sheet Ratio analysis YE Dec. 31 (IDRbn) IDR, %, x
2014 2015 2016 2017F 2018F 2019F 2020F 2014 2015 2016 2017F 2018F 2019F 2020F Cash and cash equivalent 1,675 5,511 10,654 8,851 8,309 4,225 3,999 Per share Account receivables 2,307 2,384 2,239 3,789 4,983 6,102 6,692 EPS (IDR) 38 77 126 237 298 318 360 Retention receivables 619 732 967 1,124 1,467 1,784 1,940 BVPS (IDR) 203 703 816 1,040 1,315 1,603 1,931 Gross amount due from customers 22 128 5,618 9,384 12,299 15,046 16,529 DPS (IDR) 8 7 15 13 24 30 32 Inventories 604 826 2,557 2,756 3,070 3,249 3,155 DPR (%) 30% 20% 20% 10% 10% 10% 10% Others 4,877 6,224 14,849 23,509 18,981 26,200 32,974 Current assets 10,105 15,806 36,882 49,414 49,109 56,606 65,289 Growth rates/ margins Investment in JV and associates 728 1,572 2,071 6,501 11,248 14,181 15,061 Revenue growth (%) 6% 38% 68% 66% 31% 22% 10% Investment in properties - 260 53 53 53 53 53 Earnings growth (%) 39% 105% 64% 88% 26% 6% 13% Fixed assets 622 1,923 3,275 4,721 6,613 8,924 11,463 EBIT margin (%) 9% 10% 13% 16% 16% 16% 17% Others 1,088 10,749 19,143 38,883 61,292 85,591 86,481 EBITDA margin (%) 9% 11% 14% 17% 17% 17% 17% Total assets 12,542 30,309 61,425 99,572 128,316 165,356 178,347 Dupont analysis ST debt 1,917 3,488 15,350 24,547 28,360 34,655 38,053 Net margin (%) 5% 7% 7% 8% 8% 7% 7% Account payables 2,572 5,472 7,362 11,740 16,578 20,144 22,083 Asset turnover (x) 0.8 0.5 0.4 0.4 0.4 0.4 0.4 Others 3,239 4,705 8,750 14,663 19,023 23,028 25,202 Leverage ratio (x) 4.5 3.2 5.5 7.1 7.2 7.6 6.8 Current liabilities 7,728 13,665 31,462 50,951 63,962 77,827 85,338 ROE (%) 19% 11% 15% 23% 23% 20% 19% LT debt 1,246 4,547 9,890 17,402 20,872 33,872 32,807 Others 803 2,394 3,300 4,333 5,636 6,839 7,491 Solvency and liquidity Total liabilities 9,777 20,605 44,652 72,685 90,470 118,537 125,636 Net debt/ equity (%) 54% 26% 87% 123% 108% 137% 127% Minority interest 6 157 5,704 12,769 20,000 25,065 26,503 Interest coverage (x) 4.8 4.1 3.2 2.9 3.2 2.9 3.1 Shareholders' equity 2,759 9,547 11,070 14,117 17,846 21,754 26,208 Current ratio (x) 1.3 1.2 1.2 1.0 0.8 0.7 0.8
Other key metrics IDRbn, days, %
2014 2015 2016 2017F 2018F 2019F 2020F New contract (IDRbn) 22,645 32,084 69,974 57,429 69,453 76,399 84,038 Carry over (IDRbn) 10,516 19,746 35,387 81,573 97,301 112,516 122,902 Total orderbook (IDRbn) 33,161 51,830 105,361 139,001 166,754 188,914 206,940 Non-joint operations 26,816 44,764 99,852 131,390 159,114 181,405 199,637 Joint operations 2,559 3,885 1,911 2,102 2,312 2,544 2,798 % y-y total orderbook 50% 56% 103% 32% 20% 13% 10% % y-y new contract 70% 42% 118% -18% 21% 10% 10% Burn rate (%) 31% 27% 23% 30% 33% 35% 35%
Gross margin Construction 10% 13% 16% 18% 19% 19% 19% Precast 18% 16% 22% 30% 28% 28% 28% Toll road - 51% 47% 40% 40% 40% 40% Property - - 36% 25% 25% 25% 25% Energy - - 95% 60% 40% 40% 40% Buildings and equipment rental 100% 100% 100% 100% 100% 100% 100%
Working capital days Receivables days 258 279 387 335 236 257 283 Payables days 210 262 270 272 283 283 283 Inventory days 24 25 47 32 27 24 21 Cash cycle 72 42 165 95 (20) (2) 21 Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 18
9 January 2018
Exhibit 39. Orderbook breakdown Exhibit 40. Orderbook burn rate 250,000 225 60% 200 50% 200,000 175
84,038 84,038 150 40%
76,399 76,399 37%
150,000 125 69,453 69,453
122,902 122,902 30%
IDRtn 112,516 112,516
IDRbn 100 57,429 57,429 100,000 97,301 81,573 81,573 75 20%
69,974 69,974 50 10%
50,000 35,387
22,645 22,645 63,009 63,009
69,187 69,187 25
13,317 13,317
19,746 19,746
12,264 12,264
51,564 51,564
9,769 9,769
32,084 32,084
10,516 10,516
8,813 8,813
6,567 6,567 39,417 39,417 4,733 4,733 - 0%
- 7,274 8,808 9,687 10,287 14,153 23,788
2014 2011 2012 2013 2015 2016
2017F 2018F 2019F 2020F
2015 2011 2012 2013 2014 2016
2018F 2019F 2020F 2017F Revenue Orderbook New contract Carry-over contract Revenue Burn rate (RHS) Avg burn rate, 2011/16 (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 41. Revenue vs. y-y revenue growth Exhibit 42. Revenue breakdown
80,000 80% 100% 1% 1% 1% 1% 1% 1% 1%
1% 1%
69,187 5%
70,000 70% 8%
8%
63,009
8%
8% 9%
60,000 60% 90% 15% 51,564
50,000 50%
100%
100%
99%
39,417 94%
40,000 80% 92%
40% 90%
90%
89%
89%
IDRbn 85%
30,000 23,788 30%
20,000 14,153 20% 70%
10,287
9,687 9,687
7,274
8,808
2012 2013 2014 2015 2016
10,000 10% 2011
2017F 2018F 2019F 2020F - 0% Others Buildings and equipment rental
Energy Property
2011 2015 2012 2013 2014 2016
2019F 2018F 2020F 2017F Toll road Precast (WSBP) Revenue Revenue growth (RHS) Construction Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 43. Gross profit vs. gross margin Exhibit 44. EBIT vs. EBIT margin 16,000 25%
13,981 14,000 18%
14,000 11,421 12,648 12,648 16% 20% 12,000
12,000 10,317
10,119 14% 10,000 10,000
15% 8,211 12% 7,718
8,000 8,000 10%
6,339 IDRbn
IDRbn 8% 6,000 10% 6,000
3,968 6% 4,000 4,000 3,180
5% 4%
1,921
1,403
1,109 886 886
2,000 911 2,000
732 732
672 672
663 663 540 540 449 449 2%
- 0% - 0%
2016 2014 2011 2012 2013 2014 2015 2011 2012 2013 2015 2016
2018F 2017F 2018F 2019F 2020F 2017F 2019F 2020F Gross profit Gross margin (RHS) EBIT EBIT margin (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 19
9 January 2018
Exhibit 45. Net profit vs. net margin Exhibit 46. Profitability analysis 6,000 9% 25.0%
4,886 8% 5,000
4,313 20.0%
7% 4,050 4,000 6%
15.0% 3,219 3,219 5% 3,000
IDRbn 4% 10.0%
2,000 1,713 3%
1,048 2% 5.0%
1,000
512 512 368 368
254 254 1% 172 172 0.0%
- 0%
2014 2011 2012 2013 2015 2016
2020F 2017F 2018F 2019F
2013 2011 2012 2014 2015 2016
2018F 2019F 2020F 2017F Gross margin EBIT margin Net profit Net margin (RHS) EBITDA margin Net margin Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 47. Return on asset vs. return on equity Exhibit 48. ROA vs. asset turnover 30% 4.5% 4.5% 1.6
4.0% 4.0% 1.4 25% 3.5% 3.5% 1.2 20% 3.0% 3.0% 1.0 2.5% 2.5%
15% 0.8 x 2.0% 2.0% 0.6 10% 1.5% 1.5% 1.0% 1.0% 0.4 5% 0.5% 0.5% 0.2
0% 0.0% 0.0% -
2013 2011 2012 2014 2015 2016
2011 2012 2013 2014 2015 2016
2017F 2018F 2019F 2020F
2017F 2018F 2019F 2020F ROE ROA (RHS) ROA Asset tunover (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 49. Dupont analysis Exhibit 50. Liquidity analysis 9.0 30% 1.6 0.35 8.0 0.30 25% 1.4 7.0 0.25 1.2 6.0 20% 0.20 5.0 1.0 0.15
15%
x x 4.0 0.8 0.10 x
3.0 10% 0.6 0.05 2.0 0.00 5% 0.4 1.0 -0.05 0.2 0.0 0% -0.10
- -0.15
2011 2012 2013 2014 2015 2016
2017F 2018F 2019F 2020F
2011 2012 2013 2014 2015 2016
2018F 2019F 2020F Asset turnover Equity multiplier 2017F Current ratio Quick ratio Net working capital ratio (RHS) Net margin (RHS) ROE (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 20
9 January 2018
Exhibit 51. Receivable days vs. receivable-to-revenue Exhibit 52. Due from customers & AR as % of revenue 700 1.2 60% 35%
30% 600 1.0 50% 25% 500 40% 0.8 20% 400 30% 0.6 x 15%
IDRbn 300 20% 0.4 10% 200 10% 5% 100 0.2 0% 0%
- -
2011 2012 2013 2014 2015 2016
2017F 2018F 2019F 2020F
2011 2012 2013 2014 2015 2016
2019F 2018F 2020F 2017F Gross amount due from customer as % of revenue Receivable days Receivable as % of revenue (RHS) Account receivable as % of revenue (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 53. Cash conversion cycle Exhibit 54. Cash flow analysis 450 200 30,000 400 20,000 350 150
300 10,000 100 250
- days 200 days
50 IDRbn 150 (10,000) 100 - 50 (20,000) - (50)
(30,000)
2011 2012 2013 2014 2015 2016
2017F 2018F 2019F 2020F
2012 2013 2014 2015 2016
2018F 2019F 2020F Receivable days Inventory days 2017F Payable days Cash conversion cycle (RHS) Operating cash flow Investing cash flow Financing cash flow Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 55. Operating cash flow breakdown Exhibit 56. Capital burden 20,000 25,000 15,000 20,000 15,000 10,000 10,000 5,000 5,000 - -
IDRbn (5,000) (5,000) IDRbn (10,000) (10,000) (15,000) (15,000) (20,000) (25,000) (20,000)
(30,000)
2012 2013 2014 2015 2016
2018F 2017F 2019F 2020F
2012 2013 2014 2015 2016
2018F 2019F 2020F Net profit Depreciation 2017F Changes in WC, receivables Changes in WC, inventories Investing cash flow Financing cash flow Changes in WC, payables Others Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 21
9 January 2018
Sensitivity analysis (2018F)
Changes in parent-only non-JO new contract growth and non-JO burn rate to revenue 2018F
- Parent-only non-JO new contract growth (%) Parent-only non-JO new contract growth (%) 10% 15% 20% 25% 30% 35% 40% 10% 15% 20% 25% 30% 35% 40% 18% 31,283 31,660 32,037 32,414 32,791 33,168 33,544 18% -39.3% -38.6% -37.9% -37.1% -36.4% -35.7% -34.9% 23% 37,353 37,834 38,316 38,797 39,279 39,760 40,242 23% -27.6% -26.6% -25.7% -24.8% -23.8% -22.9% -22.0% 28% 43,422 44,008 44,595 45,181 45,767 46,353 46,940 28% -15.8% -14.7% -13.5% -12.4% -11.2% -10.1% -9.0% 33% 49,491 50,182 50,873 51,564 52,255 52,946 53,637 33% -4.0% -2.7% -1.3% 0.0% 1.3% 2.7% 4.0% 38% 55,561 56,357 57,152 57,948 58,744 59,539 60,335 38% 7.8% 9.3% 10.8% 12.4% 13.9% 15.5% 17.0% 43% 61,630 62,531 63,431 64,331 65,232 66,132 67,033 43% 19.5% 21.3% 23.0% 24.8% 26.5% 28.3% 30.0%
Parent-only non-JO Parent-only non-JO
constr. burn (%) rate constr. burn (%) rate 48% 67,700 68,705 69,710 70,715 71,720 72,725 73,730 48% 31.3% 33.2% 35.2% 37.1% 39.1% 41.0% 43.0%
Changes in parent-only construction gross margin & non-JO burn rate to EPS 2018F
- Parent-only construction gross margin (%) Parent-only construction gross margin (%) 12% 14% 16% 18% 20% 22% 24% 12% 14% 16% 18% 20% 22% 24% 18% 96 135 174 212 251 290 328 18% -67.7% -54.7% -41.8% -28.8% -15.9% -2.9% 10.0% 23% 102 149 195 241 287 334 380 23% -65.7% -50.2% -34.7% -19.2% -3.7% 11.8% 27.3% 28% 108 162 216 270 324 377 431 28% -63.8% -45.7% -27.7% -9.6% 8.4% 26.5% 44.5% 33% 114 175 237 298 360 421 483 33% -61.8% -41.2% -20.6% 0.0% 20.6% 41.2% 61.8% 38% 120 189 258 327 396 465 534 38% -59.8% -36.7% -13.5% 9.6% 32.8% 55.9% 79.1% 43% 126 202 279 356 432 509 586 43% -57.9% -32.2% -6.5% 19.2% 44.9% 70.6% 96.3%
Parent-only non-JO Parent-only non-JO
constr. burn (%) rate constr. burn (%) rate 48% 132 216 300 384 469 553 637 48% -55.9% -27.7% 0.6% 28.8% 57.1% 85.3% 113.6%
Changes in due from customers and account receivables as % of revenue to total receivables 2018F
- Gross amount due from customers as % of revenue Gross amount due from customers as % of revenue 30% 40% 50% 60% 70% 80% 90% 30% 40% 50% 60% 70% 80% 90% 4% 14,833 19,979 25,125 30,271 35,418 40,564 45,710 4% -55.5% -40.1% -24.7% -9.2% 6.2% 21.6% 37.0% 6% 15,860 21,006 26,152 31,299 36,445 41,591 46,737 6% -52.4% -37.0% -21.6% -6.2% 9.3% 24.7% 40.1% 8% 16,887 22,033 27,180 32,326 37,472 42,618 47,764 8% -49.4% -33.9% -18.5% -3.1% 12.3% 27.8% 43.2% 10% 17,915 23,061 28,207 33,353 38,499 43,645 48,791 10% -46.3% -30.9% -15.4% 0.0% 15.4% 30.9% 46.3%
% of revenue of revenue % 12% 18,942 24,088 29,234 34,380 39,526 44,672 49,818 of revenue % 12% -43.2% -27.8% -12.3% 3.1% 18.5% 33.9% 49.4% 14% 19,969 25,115 30,261 35,407 40,553 45,699 50,846 14% -40.1% -24.7% -9.3% 6.2% 21.6% 37.0% 52.4%
Account as receivable 16% 20,996 26,142 31,288 36,434 41,581 46,727 51,873 Account as receivable 16% -37.0% -21.6% -6.2% 9.2% 24.7% 40.1% 55.5%
Changes in due from customers and account receivables as % of revenue to OCF 2018F
- Gross amount due from customers as % of revenue 30% 40% 50% 60% 70% 80% 90% 4% 30,760 26,080 21,399 16,719 12,038 7,358 2,677 6% 29,662 24,981 20,301 15,620 10,940 6,259 1,579 8% 28,563 23,883 19,202 14,522 9,841 5,161 480 10% 27,465 22,784 18,104 13,423 8,743 4,062 (618)
% of revenue of revenue % 12% 26,366 21,686 17,005 12,325 7,644 2,964 (1,717) 14% 25,268 20,587 15,907 11,226 6,546 1,865 (2,815) Account as receivable 16% 24,169 19,489 14,808 10,128 5,447 767 (3,914) Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 22
9 January 2018
Valuation bands and movements Forward P/E band P/E movement 10,000 34X 9,000 32.0 8,000 27.0 7,000 24X +2STD 6,000 22.0
5,000 X 16X +1STD
IDR/share 4,000 17.0 3,000 14.9X 2,000 8X 12.0 -1STD 1,000
7.0
Dec-16 Dec-13 Dec-14 Dec-15
- Dec-12
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Price 8X 16X 24X 34X P/E Average P/E
Forward P/B band P/B movement 7,000 5.4X 5.0 6,000 4.0 5,000 4.0X +2STD
4,000 3.0 +1STD X 3,000 2.6X 2.4X
IDR/share 2.0 -1STD 2,000 1.2X 1.0 -2STD 1,000
-
Dec-16 Dec-13 Dec-14 Dec-15
- Dec-12
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Price 1.2X 2.6X 4.0X 5.4X P/B Average P/B
Forward EV/EBITDA band EV/EBITDA movement 7,000 18.5 18X 6,000 16.5 +2STD 5,000 14.5 15X +1STD 4,000
X 12.5 12.0X
3,000 IDR/share 11X 10.5 2,000 -1STD 8.5 1,000 -2STD
6.5
Dec-16 Dec-13 Dec-14 Dec-15
- 7X Dec-12
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Price 7X 11X 15X 18X EV/EBITDA Average EV/EBITDA
Forward EV/orderbook band P/B ROE 3,500 6.0 30% P/B ROE (RHS) 3,000 5.0 .60X 24% 2,500 4.0 2,000 18%
.50X X 3.0 1,500 IDR/share 12% 1,000 2.0
6% 500 .40X 1.0 .20X
-
Dec-13 Dec-14 Dec-15 Dec-16
Dec-12 - 0%
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Price .20X .40X .50X .60X
Source: Bloomberg, Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 23
9 January 2018
WSKT IJ: Capital recycling is on its way
Banging on turnkey payments There are two types of turnkey projects on WSKT’s balance sheet: (1) Based on our understanding, there could be up turnkey projects from its subsidiary Waskita Toll Road and (2) turnkey to IDR38.5tn worth of WSKT turnkey projects projects from external parties, mainly the central government and PLN. to be paid in 2018F Based on our understanding, there could be up to IDR38.5tn worth of WSKT turnkey projects to be paid in 2018F, as outlined in Exhibit 57 below. However, we take this with a pinch of salt as we only priced in IDR16.1tn of turnkey payments from external parties (IDR10tn from LRT South Sumatera and IDR6.1tn from Sumatra Transmission Line) into our financial forecasts. We view that the turnkey payments from WTR could only be realized once the asset divestment is fully executed. Without the asset divestment, we believe cash movement from WTR to WSKT is similar to cash movement from the left to the right pocket considering that WTR financials are fully consolidated into WSKT. In addition, under our currently assumed scenario, even without divesting its toll-road assets, the company would still be able to deliver positive OCF for the first time since 2015.
Exhibit 57. WSKT turnkey payment schedule Payment period Toll road concessions Construction contracts (IDRbn) Target completion 2018 Bekasi - Cawang - Kampung Melayu 1,500 2H17 Medan - Kualanamu - Tb. Tinggi 1,350 2H17 Ngawi - Kertosono 1,500 2H17 Pejagan - Pemalang 3,000 1H18 Pemalang - Batang 2,200 1H18 Pasuruan - Probolinggo 3,200 1H18 Semarang - Batang 5,800 1H18 Solo - Ngawi 3,900 2H17 Total 22,450 2019 Cimanggis - Cibitung 6,100 2H18 Cinere - Serpong 2,200 1H19 Total 8,300 2020 Ciawi - Sukabumi 4,250 2H19 Cibitung - Cilincing 5,100 2H19 Kayuagung - Palembang - Betung 7,100 2H19 Krian - Legundi - Bunder - Manyar 3,250 2H19 Total 19,700 2021 Cileunyi - Sumedang - Dawuan - 2H20 Depok - Antasari 650 2H20 Kuala Tj. - Tb. Tinggi - Parapat - 2H20 Total 650
From external parties (mainly central government and PLN) Payment period Projects Project owner Contract size (IDRbn) Due 2018 Palembang LRT Kementrian Perhubungan 10,000 Dec-17 Sumatera Transmission Line 500 kVa PLN 6,106 Oct-18 Total 16,106 Source: Company data, Bahana estimates
Asset divestment to sweeten up our constructive view on WSKT We provide a summary of WTR’s majority and minority toll-road investments There are still a few possible scenarios that in Exhibits 58. After turnkey payments from the two afore-mentioned WSKT is currently pursuing: (1) individual or projects, we view that the next round of capital recycling strategy that will bundle sale of its toll-road assets to direct fully revive investors’ sentiment towards WSKT is through asset divestment. investors, (2) combining its Trans-Java toll- However, we have not taken into consideration the divestment of WTR into road sections together with JSMR’s sections, our forecasts yet. Currently, there are still a few possible scenarios that followed by an IPO, (3) IPO of WTR, and (4) WSKT is currently pursuing: (1) individual or bundle sale of its toll-road rights issue of WTR assets to direct investors, (2) combining its Trans-Java toll-road sections together with JSMR’s sections, followed by an IPO, (3) IPO of WTR, and (4) rights issue of WTR. Among the alternatives, we think the first and second scenarios are the ones that most likely to happen. In the first scenario, WSKT management has communicated to investors that the company will not accept any offer lower than 1.5x PBV given its previous investors, Sarana Multi Infrastruktur (SMI) and Civil Servants Pension Fund (Taspen), purchased a combined 21% stake in WTR at 1.5x of book value back in February 2017. At 1.5-1.8x PBV, assuming WTR sold all of their toll-road assets, we believe WTR might be able to obtain proceeds of approximately IDR30.2-36.2tn (Exhibit 62).
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Exhibit 58. WTR’s majority and minority toll-road investments Concession periods Operating period Investment (IDRbn) WSKT stake in WTR: 71% Waskita Toll Road (WTR) Distance Construction Concession Sections Routes Ownership Debt Equity Shares in Investment Debt Equity Shares in Investment Debt Equity IRR (km) period Start End Length Bahana estimates Total (70%) (30%) concessions (%) (IDRbn) (70%) (30%) concessions (%) (IDRbn) (70%) (30%) Majority Investments: #1 Bekasi - Cawang - Kampung Melayu PT Kresna Kusuma Dyandra Marga 21.5 2014 - 2019 2011 2056 45 13,000 9,100 3,900 43% 5,530 3,871 1,659 60% 7,800 5,460 2,340 15.5% Bekasi - Cawang - Kampung Melayu Section I Casablanca - Jakasampurna WTR (60%), Tirtobumi Prakarsatama (14.97%), Citra Mandiri Sukses Sejati 11.5 2015 - 2017 2011 2056 45 4Q17 6,953 4,867 2,086 43% 2,958 2,071 887 60% 4,172 2,920 1,252 15.5% Bekasi - Cawang - Kampung Melayu Section II Jakasampurna - Duren Jaya (12%), Indadi Utama (6%), Remaja Bangun Kencana (6%), JSMR (1.03%) 10.0 2016 - 2019 2011 2056 45 4Q19 6,047 4,233 1,814 43% 2,572 1,801 772 60% 3,628 2,540 1,088 15.6% #2 Ciawi - Sukabumi PT Trans Jabar Toll Road 54.0 2015 - 2019 2008 2053 45 7,700 5,390 2,310 71% 5,459 3,821 1,638 100% 7,699 5,389 2,310 13.3% Ciawi - Sukabumi Section I Ciawi - Lido WTR (81.46%), Jasa Sarana (8.22%), Bukaka (10.13%) 14.6 2015 - 2017 2008 2053 45 4Q17 2,082 1,457 625 71% 1,476 1,033 443 100% 2,082 1,457 624 13.1% Ciawi - Sukabumi Section II Cigombak - Cibadak 12.7 2017 - 2019 2008 2053 45 4Q19 1,804 1,263 541 71% 1,279 895 384 100% 1,804 1,263 541 13.4% Ciawi - Sukabumi Section III Cibadak - Sukabumi 13.9 2017 - 2019 2008 2053 45 4Q19 1,982 1,387 595 71% 1,405 984 422 100% 1,982 1,387 595 13.4% Ciawi - Sukabumi Section IV West Sukabumi - East Sukabumi 12.9 2017 - 2019 2008 2053 45 4Q19 1,832 1,283 550 71% 1,299 909 390 100% 1,832 1,282 550 13.4% #3 Cibitung - Cilincing PT MTD CTP Expressway 34.0 2017 - 2019 2015 2050 35 4,220 2,954 1,266 39% 1,646 1,152 494 55% 2,321 1,625 696 14.2% Cibitung - Cilincing Section I Cibitung - Telaga Asih WTR (55%), Pelindo II (45%) 3.0 2017 - 2019 2015 2050 35 4Q19 367 257 110 39% 143 100 43 55% 202 141 61 14.2% Cibitung - Cilincing Section II Telaga Asih - Tembelang 9.4 2017 - 2019 2015 2050 35 4Q19 1,167 817 350 39% 455 319 137 55% 642 449 193 14.2% Cibitung - Cilincing Section III Tembelang - Mekar Jaya 13.1 2017 - 2019 2015 2050 35 4Q19 1,624 1,137 487 39% 633 443 190 55% 893 625 268 14.2% Cibitung - Cilincing Section IV Mekar Jaya - Cilincing 8.6 2017 - 2019 2015 2050 35 4Q19 1,062 743 319 39% 414 290 124 55% 584 409 175 14.2% #4 Cimanggis - Cibitung PT Cimanggis Cibitung Tollways 25.2 2016 - 2019 2007 2042 35 4,500 3,150 1,350 64% 2,871 2,010 861 90% 4,050 2,835 1,215 14.6% Cimanggis - Cibitung Section I - II Junction Cimanggis - Trans Yogie IC - Narogong IC WTR (90%), Bakrie (10%) 8.8 2016 - 2018 2007 2042 35 4Q18 1,562 1,093 469 64% 997 698 299 90% 1,406 984 422 14.5% Cimanggis - Cibitung Section III - IV Narogong IC - Setu - Cibitung Junction 16.5 2017 - 2019 2007 2042 35 1Q20 2,938 2,057 881 64% 1,875 1,312 562 90% 2,644 1,851 793 14.7% #5 Kanci - Pejagan PT Semesta Marga Raya 35.0 Operating 2006 2041 35 2,200 1,540 660 55% 1,217 852 365 78% 1,716 1,201 515 15.0% Kanci - Pejagan Kanci - Pejagan Waskita MNC Trans Java Toll Road WMTTR (77.69%), Paspro (22.31%) 35.0 Operating 2006 2041 35 1Q10 2,200 1,540 660 55% 1,217 852 365 78% 1,716 1,201 515 15.0% #6 Kayu Agung - Palembang - Betung PT Sriwijaya Makmore Persada 111.7 2017 - 2019 2015 2055 40 14,435 10,105 4,331 55% 7,983 5,588 2,395 78% 11,259 7,882 3,378 12.4% Kayu Agung - Palembang - Betung Section I Kayu Agung - Jakabaring WTR (60%), PT Persada Tanjung Api-Api (30.25%), PT Kayson Company 33.5 2017 - 2019 2015 2055 40 4Q19 4,330 3,031 1,299 55% 2,394 1,676 718 78% 3,377 2,364 1,013 12.4% Kayu Agung - Palembang - Betung Section II Jakabaring - Muslindas (4.75%), PT Sriwijaya Marga Persada (4%), PT Perusda Prodexim (1%) 33.9 2017 - 2019 2015 2055 40 4Q19 4,381 3,067 1,314 55% 2,423 1,696 727 78% 3,417 2,392 1,025 12.4% Kayu Agung - Palembang - Betung Section III Muslindas - Betung 44.3 2017 - 2019 2015 2055 40 4Q19 5,724 4,007 1,717 55% 3,166 2,216 950 78% 4,465 3,125 1,339 12.4% #7 Krian - Legundi - Bunder - Manyar PT Waskita Bumi Wira 38.3 2017 - 2019 2016 2061 45 9,200 6,440 2,760 39% 3,588 2,511 1,076 55% 5,060 3,542 1,518 12.3% Krian - Legundi - Bunder - Manyar Section I Krian - Kedamen WTR (55%), PT Energi Bumi Mining (25), PT Panca Wira Usaha (20%) 9.5 2017 - 2019 2016 2061 45 1Q20 2,283 1,598 685 39% 890 623 267 55% 1,255 879 377 12.3% Krian - Legundi - Bunder - Manyar Section II Kedamen - Boboh 9.1 2017 - 2019 2016 2061 45 1Q20 2,186 1,531 656 39% 853 597 256 55% 1,203 842 361 12.3% Krian - Legundi - Bunder - Manyar Section III Boboh - Bunder 10.6 2017 - 2019 2016 2061 45 1Q20 2,540 1,778 762 39% 990 693 297 55% 1,397 978 419 12.3% Krian - Legundi - Bunder - Manyar Section IV Bunder - Manyar 9.1 2017 - 2019 2016 2061 45 1Q20 2,191 1,534 657 39% 854 598 256 55% 1,205 844 362 12.3% #8 Pejagan - Pemalang PT Pejagan Pemalang Toll Road 57.5 2016 - 2018 2014 2059 45 6,840 4,788 2,052 71% 4,849 3,394 1,455 100% 6,839 4,788 2,052 13.9% Pejagan - Pemalang Section I Pejagan - West Brebes Waskita MNC Trans Java Toll Road WMTTR (99.99%), WSKT (0.01%) 14.2 Operating 2014 2059 45 2Q16 1,689 1,182 507 71% 1,198 838 359 100% 1,689 1,182 507 13.4% Pejagan - Pemalang Section II West Brebes - East Brebes 6.0 Operating 2014 2059 45 2Q16 714 500 214 71% 506 354 152 100% 714 500 214 13.4% Pejagan - Pemalang Section III East Brebes - East Tegal 10.4 2016 - 2018 2014 2059 45 2Q18 1,237 866 371 71% 877 614 263 100% 1,237 866 371 14.2% Pejagan - Pemalang Section IV East Tegal - Pemalang 26.9 2016 - 2018 2014 2059 45 2Q18 3,200 2,240 960 71% 2,269 1,588 681 100% 3,200 2,240 960 14.1% #9 Pemalang - Batang PT Pemalang Batang Toll Road 39.0 2016 - 2018 2015 2060 45 4,080 2,856 1,224 43% 1,736 1,215 521 60% 2,448 1,714 734 14.2% Pemalang - Batang Section I Pemalang - Pekalongan WTR (60%), PT Sumber Mitra Jaya (40%) 23.5 2016 - 2018 2015 2060 45 2Q18 2,458 1,721 738 43% 1,046 732 314 60% 1,475 1,033 443 14.2% Pemalang - Batang Section II Pekalongan - Batang 15.5 2016 - 2018 2015 2060 45 2Q18 1,622 1,135 486 43% 690 483 207 60% 973 681 292 14.2% #10 Pasuruan - Probolinggo PT Transjawa Paspro Jalan Tol 31.3 2016 - 2018 2015 2060 45 3,800 2,660 1,140 57% 2,155 1,509 647 80% 3,040 2,128 912 12.1% Pasuruan - Probolinggo Section I Grati - Nguling (Kabupaten Pasuruan) Waskita MNC Trans Java Toll Road WMTTR (80%), Bukaka (20%) 8.0 2016 - 2018 2015 2060 45 2Q18 972 680 292 57% 551 386 165 80% 778 544 233 12.1% Pasuruan - Probolinggo Section II Wilayah Kabupaten Probolinggo 22.1 2016 - 2018 2015 2060 45 2Q18 2,682 1,878 805 57% 1,521 1,065 456 80% 2,146 1,502 644 12.1% Pasuruan - Probolinggo Section III Wilayah Kota Probolinggo 1.2 2016 - 2018 2015 2060 45 2Q18 146 102 44 57% 83 58 25 80% 117 82 35 12.1%
Minority Investments: #11 Cinere - Serpong PT Cinere Serpong Jaya 10.1 2017 - 2019 2008 2048 40 2,210 1,547 663 25% 548 384 165 35% 774 541 232 17.2% Cinere - Serpong Section I Serpong - Pamulang WTR (34.99%), WSKT (0.01%), JSMR (55%), Jakpro (10%) 4.5 2017 - 2019 2008 2048 40 2Q19 987 691 296 25% 245 172 74 35% 346 242 104 17.2% Cinere - Serpong Section II Pamulang - Cinere 5.6 2017 - 2019 2008 2048 40 2Q19 1,223 856 367 25% 303 212 91 35% 428 300 128 17.2% #12 Cileunyi - Sumedang - Dawuan PT Cinere Serpong Jaya 62.0 2017 - 2020 2015 2055 40 8,410 5,887 2,523 11% 894 626 268 15% 1,262 883 378 10.8% Cileunyi - Sumedang - Dawuan Section I (Govt) Cileunyi - Tanjungsari WTR (15%), CMNP (51%), PTPP (14%), Brantas Abipraya (10%), Jasa Sarana 12.0 2017 - 2020 2015 2055 40 4Q20 1,631 1,142 489 11% 173 121 52 15% 245 171 73 10.9% Cileunyi - Sumedang - Dawuan Section II (Govt) Tanjungsari - Sumedang (10%) 17.4 2017 - 2020 2015 2055 40 4Q20 2,356 1,649 707 11% 251 175 75 15% 353 247 106 10.8% Cileunyi - Sumedang - Dawuan Section III Sumedang - Cimalaka 3.8 2017 - 2020 2015 2055 40 4Q20 509 356 153 11% 54 38 16 15% 76 53 23 10.8% Cileunyi - Sumedang - Dawuan Section IV Cimalaka - Legok 8.2 2017 - 2020 2015 2055 40 4Q20 1,112 779 334 11% 118 83 35 15% 167 117 50 10.8% Cileunyi - Sumedang - Dawuan Section V Legok - Ujungjaya 16.4 2017 - 2020 2015 2055 40 4Q20 2,228 1,559 668 11% 237 166 71 15% 334 234 100 10.8% Cileunyi - Sumedang - Dawuan Section VI Ujungjaya - Ketajati 4.2 2017 - 2020 2015 2055 40 4Q20 574 402 172 11% 61 43 18 15% 86 60 26 10.8% #13 Depok - Antasari PT Citra Wassphutowa 21.5 2015 - 2020 2011 2051 40 4,767 3,337 1,430 9% 439 308 132 13% 620 434 186 16.5% Depok - Antasari Section I Antasari - Sawangan WTR (12.5%), PTPP (12.5%), HK (12.5%), CMNP (62.5%) 8.4 2015 - 2017 2011 2051 40 1Q18 1,862 1,304 559 9% 172 120 51 13% 242 169 73 16.3% Depok - Antasari Section II Sawangan - Bojonggede 13.1 2017 - 2020 2011 2051 40 4Q20 2,905 2,033 871 9% 268 187 80 13% 378 264 113 16.6% #14 Kuala Tanjung - Tebing Tinggi - Parapat PT Hutama Marga Waskita 143.3 2017 - 2020 2017 2057 40 13,450 9,415 4,035 21% 2,861 2,003 858 30% 4,035 2,825 1,211 9.2% Kuala Tanjung - Tebing Tinggi - Parapat Section I Tebing Tinggi - Indrapura WTR (40%), JSMR (30%), HK (30%) 23.3 2017 - 2020 2017 2057 40 4Q20 2,183 1,528 655 21% 464 325 139 30% 655 458 196 9.3% Kuala Tanjung - Tebing Tinggi - Parapat Section II Kuala Tanjung - Indrapura 21.5 2017 - 2020 2017 2057 40 4Q20 2,019 1,413 606 21% 429 301 129 30% 606 424 182 9.2% Kuala Tanjung - Tebing Tinggi - Parapat Section III Tebing Tinggi - Serbelawan 30.0 2017 - 2020 2017 2057 40 4Q20 2,817 1,972 845 21% 599 419 180 30% 845 592 254 9.2% Kuala Tanjung - Tebing Tinggi - Parapat Section IV Serbelawan - Pematang Siantar 23.0 2017 - 2020 2017 2057 40 4Q20 2,160 1,512 648 21% 459 322 138 30% 648 453 194 9.2% Kuala Tanjung - Tebing Tinggi - Parapat Section V Parapat - Pematang Siantar 20.0 2017 - 2020 2017 2057 40 4Q20 1,878 1,314 563 21% 399 280 120 30% 563 394 169 9.2% Kuala Tanjung - Tebing Tinggi - Parapat Section VI Seribudolok - Parapat 25.5 2017 - 2020 2017 2057 40 4Q20 2,394 1,676 718 21% 509 356 153 30% 718 503 215 9.2% #15 Medan - Kualanamu - Tebing Tinggi PT Jasa Marga Kualanamu Toll 61.7 2015 - 2017 2015 2055 40 4,000 2,800 1,200 11% 425 298 128 15% 600 420 180 14.0% Medan - Kualanamu - Tebing Tinggi Section I (Govt) Medan - Perbarakan - Kualanamu WTR (15%), JSMR (55%), PTPP (15%), HK (15%) 17.8 2015 - 2017 2015 2055 40 1Q18 1,154 808 346 11% 123 86 37 15% 173 121 52 16.5% Medan - Kualanamu - Tebing Tinggi Section II Perbarakan - Lubuk Pakam 4.9 2015 - 2017 2015 2055 40 1Q18 314 220 94 11% 33 23 10 15% 47 33 14 12.7% Medan - Kualanamu - Tebing Tinggi Section II Lubuk Pakam - Perbaungan 12.4 2015 - 2017 2015 2055 40 1Q18 803 562 241 11% 85 60 26 15% 120 84 36 12.7% Medan - Kualanamu - Tebing Tinggi Section II Perbaungan - Teluk Mengkudu 9.6 2015 - 2017 2015 2055 40 1Q18 620 434 186 11% 66 46 20 15% 93 65 28 12.7% Medan - Kualanamu - Tebing Tinggi Section II Teluk Mengkudu - Sei Rampah 7.8 2015 - 2017 2015 2055 40 1Q18 508 355 152 11% 54 38 16 15% 76 53 23 12.7% Medan - Kualanamu - Tebing Tinggi Section II Sei Rampah - Tebing Tinggi 9.3 2015 - 2017 2015 2055 40 1Q18 600 420 180 11% 64 45 19 15% 90 63 27 12.7%
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 25
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Concession periods Operating period Investment (IDRbn) WSKT stake in WTR: 71% Waskita Toll Road (WTR) Distance Construction Concession Sections Routes Ownership Debt Equity Shares in Investment Debt Equity Shares in Investment Debt Equity IRR (km) period Start End Length Bahana estimates Total (70%) (30%) concessions (%) (IDRbn) (70%) (30%) concessions (%) (IDRbn) (70%) (30%) #16 Ngawi - Kertosono PT Ngawi Kertosono Jaya 87.0 2016 - 2017 2011 2046 35 3,831 2,682 1,149 28% 1,086 761 326 40% 1,532 1,073 460 14.9% Ngawi - Kertosono (Govt) Ngawi -Magetan WTR (40%), JSMR (60%) 20.0 2016 - 2017 2011 2046 35 1Q18 881 616 264 28% 250 175 75 40% 352 247 106 14.9% Ngawi - Kertosono Section I Magetan - Madiun 8.5 2016 - 2017 2011 2046 35 1Q18 372 260 112 28% 106 74 32 40% 149 104 45 14.9% Ngawi - Kertosono Section II Madiun - Kertosono 21.1 2016 - 2017 2011 2046 35 1Q18 927 649 278 28% 263 184 79 40% 371 260 111 14.9% Ngawi - Kertosono Section III Saradan - Kertosono 37.5 2016 - 2017 2011 2046 35 1Q18 1,651 1,156 495 28% 468 328 140 40% 660 462 198 14.9% #17 Semarang - Batang PT Jasa Marga Semarang Batang 75.0 2016 - 2018 2016 2061 45 11,000 7,700 3,300 28% 3,120 2,184 936 40% 4,400 3,080 1,320 12.7% Semarang - Batang Section I Batang - SS Batang Timur WTR (40%), JSMR (60%) 3.2 2016 - 2018 2016 2061 45 2Q18 469 329 141 28% 133 93 40 40% 188 131 56 12.7% Semarang - Batang Section II SS Batang Timur - SS Weleri 36.4 2016 - 2018 2016 2061 45 2Q18 5,331 3,732 1,599 28% 1,512 1,058 454 40% 2,133 1,493 640 12.7% Semarang - Batang Section III SS Weleri - SS Kendal 11.1 2016 - 2018 2016 2061 45 2Q18 1,621 1,134 486 28% 460 322 138 40% 648 454 194 12.7% Semarang - Batang Section IV (Govt) SS Kendal - SS Kaliwungu 13.5 2016 - 2018 2016 2061 45 2Q18 1,980 1,386 594 28% 562 393 168 40% 792 554 238 12.7% Semarang - Batang Section V (Govt) SS Kaliwungu - SS Krapyak 10.9 2016 - 2018 2016 2061 45 2Q18 1,599 1,119 480 28% 453 317 136 40% 639 448 192 12.7% #18 Solo - Ngawi PT Solo Ngawi Jaya 90.1 2015 - 2017 2011 2046 35 4,300 3,010 1,290 28% 1,219 854 366 40% 1,720 1,204 516 15.2% Solo - Ngawi Section I (Govt) Kertosuro - Karanganyar WTR (40%), JSMR (60%) 20.9 2015 - 2017 2011 2046 35 1Q18 997 698 299 28% 283 198 85 40% 399 279 120 11.0% Solo - Ngawi Section IA Karanganyar - Seragen 14.6 2015 - 2017 2011 2046 35 1Q18 697 488 209 28% 198 138 59 40% 279 195 84 11.0% Solo - Ngawi Section IB Seragen - Mantingan 20.4 2015 - 2017 2011 2046 35 1Q18 974 682 292 28% 276 193 83 40% 389 273 117 11.0% Solo - Ngawi Section II Mantingan - Ngawi 34.2 2015 - 2017 2011 2046 35 1Q18 1,632 1,143 490 28% 463 324 139 40% 653 457 196 18.6% Total 998.2 121,943 85,360 36,583 39% 47,627 33,339 14,288 55% 67,175 47,022 20,152 13.3% Majority 447.5 69,975 48,983 20,993 53% 37,033 25,923 11,110 75% 52,233 36,563 15,670 13.7% Minority 550.7 51,968 36,378 15,590 20% 10,594 7,416 3,178 29% 14,942 10,459 4,483 12.8% Source: Company data, Bahana estimates
Exhibit 59. WTR’s construction cost per km Exhibit 60. IRR of WTR’s majority investments Exhibit 61. IRR of WTR’s minority investments 450 24.0% WSKT internal estimate Bahana estimate 24.0% 393 393 Majority stakes Minority stakes
400 22.0% 20.0% 17.2%
350 16.5%
19.0% 15.2%
20.0% 14.9%
14.0% 18.0%
300 18.0% 16.0%
17.2%
12.7%
17.0% 17.0%
18.0% 16.8%
16.0% 10.8%
250 15.8%
15.5% 12.0%
15.0%
15.0% 9.2%
16.0% 14.6%
156 156 14.2%
200 14.2%
144 144
13.9%
142 142
13.3% 116 116
IDRbn/km 150 14.0% 8.0%
12.4%
95 95
12.3%
93 93
12.1%
88 88
84 84
81 81
79 79
77 77 68 68
100 61 12.0%
42 42 41 41
31 31 4.0% 29 29 50 10.0% - 0.0%
8.0%
SoloNgawi -
SoloNgawi -
KanciPejagan -
Dawuan
Cinere- Serpong DepokAntasari -
Manyar
Betung
CinereSerpong -
KanciPejagan -
DepokAntasari -
Tinggi
Tinggi
Melayu
CiawiSukabumi -
NgawiKertosono -
Betung
Manyar
Parapat
NgawiKertosono -
SemarangBatang -
PemalangBatang -
CiawiSukabumi -
CibitungCilincing -
Melayu
SemarangBatang -
PejaganPemalang -
-Parapat
CibitungCilincing -
PemalangBatang -
CimanggisCibitung -
(Cisumdawu)
PejaganPemalang -
CimanggisCibitung -
CileunyiSumedang - -
Pasuruan - Probolinggo
Pasuruan - Probolinggo
KrianLegundi - - Bunder-
Kayu AgungPalembang - -
KayuagungPalembang - -
KrianLegundi - - Bunder-
Bekasi -Cawang Kampung -
Medan - KualanamuTebing -
Medan - KualanamuTebing -
Bekasi -Cawang Kampung -
CileunyiSumedang - Dawuan - KualaTanjung - TebingTinggi - KualaTanjung - TebingTinggi Source: Company data, Bahana estimates Source: Company data, Bahana estimates Source: Company data, Bahana estimates
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Exhibit 62. Expected proceeds from WTR’s majority and minority investments Length WTR stake WTR equity WTR proceeds at target PBV (x) List of toll roads (km) (%) (IDRbn) 1.2 1.5 1.8 2.0 2.3 2.5 2.7 3.0 Majority investments: 1) Bekasi - Cawang - Kampung Melayu 21.5 60% 2,340 2,808 3,510 4,212 4,680 5,382 5,850 6,318 7,020 2) Ciawi - Sukabumi 54.0 100% 2,310 2,772 3,465 4,158 4,620 5,312 5,774 6,236 6,929 3) Cibitung - Cilincing 34.0 55% 696 836 1,044 1,253 1,393 1,601 1,741 1,880 2,089 4) Cimanggis - Cibitung 25.2 90% 1,215 1,458 1,823 2,187 2,430 2,795 3,038 3,281 3,645 5) Kanci - Pejagan 35.0 78% 515 618 772 927 1,030 1,184 1,287 1,390 1,544 6) Kayu Agung - Palembang - Betung 111.7 78% 3,378 4,053 5,067 6,080 6,756 7,769 8,444 9,120 10,133 7) Krian - Legundi - Bunder - Manyar 38.3 55% 1,518 1,822 2,277 2,732 3,036 3,491 3,795 4,099 4,554 8) Pejagan - Pemalang 57.5 100% 2,052 2,462 3,078 3,693 4,104 4,719 5,129 5,540 6,155 9) Pemalang - Batang 39.0 60% 734 881 1,102 1,322 1,469 1,689 1,836 1,983 2,203 10) Pasuruan - Probolinggo 31.3 80% 912 1,094 1,368 1,641 1,824 2,097 2,280 2,462 2,736 Subtotal 447.5 75% 15,670 18,804 23,505 28,206 31,340 36,040 39,174 42,308 47,009 Minority investments: 1) Cinere - Serpong 10.1 35% 232 278 348 418 464 534 580 627 696 2) Cileunyi - Sumedang - Dawuan 62.0 15% 378 454 568 681 757 870 946 1,022 1,135 3) Depok - Antasari 21.5 13% 186 223 279 335 372 428 465 502 558 4) Kuala Tanjung - Tebing Tinggi - Parapat 143.3 30% 1,211 1,453 1,816 2,179 2,421 2,784 3,026 3,268 3,632 5) Medan - Kualanamu - Tebing Tinggi 61.7 15% 180 216 270 324 360 414 450 486 540 6) Ngawi - Kertosono 87.0 40% 460 552 690 827 919 1,057 1,149 1,241 1,379 7) Semarang - Batang 75.0 40% 1,320 1,584 1,980 2,376 2,640 3,036 3,300 3,564 3,960 8) Solo - Ngawi 90.1 40% 516 619 774 929 1,032 1,187 1,290 1,393 1,548 Subtotal 550.7 29% 4,483 5,379 6,724 8,069 8,965 10,310 11,207 12,103 13,448 Total 998.2 55% 20,152 24,183 30,229 36,274 40,305 46,351 50,381 54,411 60,457 Source: Company data, Bahana estimates
However, we think WSKT might not divest all of these toll-road assets in a At 1.5-1.8x PBV, we believe WTR might be able one-go manner. WSKT will try to balance out between their and investors’ to attain proceeds of IDR13.5-16.3tn for these perspectives. From the WSKT side, if asset divestments were to happen this nine toll-road assets year, they need to divest the toll-road assets that have been completed or will be completed this year, as depreciation starts to kick in and interest expense can no longer be capitalized into its financials. From the investors’ perspective, they will go after lucrative toll-road assets with high IRR, which implies that they will most likely put bid towards WTR’s Trans-Java related toll-road assets. We believe there are currently nine toll-road sections that perfectly fit the bill (Exhibit 63). At 1.5-1.8x PBV, we believe WTR might be able to attain proceeds of IDR13.5-16.3tn for these nine toll-road assets.
Exhibit 63. Direct sale of WTR’s nine toll-road assets could generate IDR13.5-16.3tn proceeds Length WTR stake WTR equity WTR proceeds at target PBV (x) List of toll roads (km) (%) (IDRbn) 1.2 1.5 1.8 2.0 2.3 2.5 2.7 3.0 Majority investments: 1) Bekasi - Cawang - Kampung Melayu 21.5 60% 2,340 2,808 3,510 4,212 4,680 5,382 5,850 6,318 7,020 2) Kanci - Pejagan 35.0 78% 515 618 772 927 1,030 1,184 1,287 1,390 1,544 3) Pejagan - Pemalang 57.5 100% 2,052 2,462 3,078 3,693 4,104 4,719 5,129 5,540 6,155 4) Pemalang - Batang 39.0 60% 734 881 1,102 1,322 1,469 1,689 1,836 1,983 2,203 5) Pasuruan - Probolinggo 31.3 80% 912 1,094 1,368 1,641 1,824 2,097 2,280 2,462 2,736 Subtotal 184.3 6,553 7,863 9,829 11,795 13,106 15,072 16,382 17,693 19,659 Minority investments: 1) Medan - Kualanamu - Tebing Tinggi 61.7 15% 180 216 270 324 360 414 450 486 540 2) Ngawi - Kertosono 87.0 40% 460 552 690 827 919 1,057 1,149 1,241 1,379 3) Semarang - Batang 75.0 40% 1,320 1,584 1,980 2,376 2,640 3,036 3,300 3,564 3,960 4) Solo - Ngawi 90.1 40% 516 619 774 929 1,032 1,187 1,290 1,393 1,548 Subtotal 313.8 2,476 2,971 3,714 4,456 4,951 5,694 6,189 6,684 7,427 Total 498.1 9,029 10,834 13,543 16,252 18,057 20,766 22,572 24,377 27,086 Source: Company data, Bahana estimates
In the second scenario, WSKT could divest its toll-road assets through an WSKT could divest its toll-road assets through IPO of Trans Java. WSKT (through WTR) and Jasa Marga (JSMR) are the two an IPO of Trans Java with Jasa Marga largest concession holders of sixteen main Trans-Java toll-road sections, which have a total combined investment of close to IDR73tn, assuming debt- to-equity of 70/30 (excluding JSMR’s five operating toll roads). If investors are willing to pay 1.5-1.8x PBV for a Trans-Java IPO, WTR could raise around IDR4-4.8tn for its 22% stake in the combined entity (Exhibit 64). It is worth noting that we still use JSMR’s current book value for its 5 matured toll-road assets, which likely to be revised up post asset revaluation prior to the IPO.
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 27
9 January 2018
Exhibit 64. Expected proceeds from IPO of Trans Java
Trans Java toll roads Length Investment Ownership DER Equity (IDRtn) Status (km) (IDRbn) JSMR WTR Combined JSMR WTR Combined 1) Jakarta - Cikampek 83 4,200 100% - 100% - 4,200 - 4,200 Fully operated, matured 2) Cikampek - Padalarang 59 4,645 100% - 100% - 4,645 - 4,645 Fully operated, matured 3) Padalarang - Cileunyi 64 3,200 100% - 100% - 3,200 - 3,200 Fully operated, matured 4) Palimanan - Kanci 26 1,300 100% - 100% - 1,300 - 1,300 Fully operated, matured 5) Kanci - Pejagan 35 2,200 - 78% 78% 70/30 - 513 513 Newly operated 6) Pejagan - Pemalang 58 6,840 - 100% 100% 70/30 - 2,052 2,052 Half operated 7) Pemalang - Batang 39 4,080 - 60% 60% 70/30 - 734 734 In construction 8) Batang - Semarang 75 11,000 60% 40% 100% 70/30 1,980 1,320 3,300 In construction 9) Semarang - Solo 73 7,300 59% - 59% 70/30 1,292 - 1,292 Half operated 10) Solo - Ngawi 90 4,300 60% 40% 100% 70/30 774 516 1,290 In construction 11) Ngawi - Kertosono 87 3,831 60% 40% 100% 70/30 690 460 1,149 In construction 12) Kertosono - Mojokerto 36 3,480 55% - 55% 70/30 574 - 574 Newly operated 13) Surabaya - Gempol 49 2,500 100% - 100% - 2,500 - 2,500 Fully operated, matured 14) Gempol - Pandaan 14 1,472 91% - 91% 70/30 402 - 402 Fully operated 15) Pandaan - Malang 38 5,970 60% - 60% 70/30 1,075 - 1,075 In construction 16) Gempol - Pasuruan 34 2,769 99% - 99% 70/30 822 - 822 In construction 17) Pasuruan - Probolinggo 31 3,800 - 100% 100% 70/30 - 1,140 1,140 In construction Total 891 72,887 23,454 6,735 30,189 Implied stake 78% 22% 100%
Theoretical valuation Stake Target PBV (x) 1.5 1.8 2.0 2.3 2.5 2.8 3.0 Equity value at IPO (IDRtn) 45,283 54,339 60,377 69,434 75,472 84,528 90,566 Free float assumption 40% 40% 40% 40% 40% 40% 40% IPO proceeds JSMR 78% 14,072 16,887 18,763 21,577 23,454 26,268 28,144 WTR 22% 4,041 4,849 5,388 6,196 6,735 7,543 8,082 Total 18,113 21,736 24,151 27,774 30,189 33,811 36,226 Source: Company data, Bahana estimates
In addition, there are some recent toll-road transactions executed recently:
. 15% stake sale in Trans Marga Jateng (TMJ), the concession holder of Semarang – Solo toll road, from Jasamarga (JSMR) to Astratel Nusantara. The deal was priced at 3.0x PBV. The toll road has been in operation since 2010. . 44.8% stake sale of Lintas Marga Sedaya (LMS), the concession holder of Cikampek – Palimanan toll road, from Surya Semesta Internusa (SSIA), Nusa Raya Cipta (NRCA) and Saratoga Investama Sedaya (SRTG) to Astratel Nusantara. The deal was priced at 2.8x PBV. The toll road itself was sold after only 1.5 years of operation. . 48.3% stake sale of Nusantara Infrastructure (META), an integrated infrastructure company, from PT Matahari Kapital Indonesia (Rajawali group) to Metro Pasific Tollways Indonesia (Salim group). The deal was priced at 1.95x PBV. META is exposed to transportation infrastructure (toll roads and ports) and utilities infrastructure (renewable energy power plants, telecommunication towers, and water treatment).
We think an IPO of WTR is less likely to happen given WSKT is aiming to IPO of WTR is less likely to happen given WSKT be a toll-road developer, rather than toll-road operator. We believe demand is aiming to be a toll-road developer, rather from institutional investors towards the initial public offering might be than toll-road operator lacking considering that WTR is still in a heavy capex cycle and traffic of its toll-road assets is still very light in volume.
Leverage remains below management target and debt covenants: Post turnkey payments, we expect WSKT will We believe much of WSKT’s underperformance versus JCI in the past two be able to maintain its 2019F debt-to-equity years was due to market concerns on funding visibility given its highly position at 1.5x, well below management’s geared projected balance sheet and chunky capex plans. Post turnkey target payments outlined above, we expect WSKT will be able to maintain its 2019F debt-to-equity position at 1.5x, well below management’s target of <2.0x and its debt covenant requirement of <2.3x respectively.
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 28
9 January 2018
Current WSKT share price implies no turnkey payments or asset divestments: We provide a sensitivity analysis on WSKT financials if the company does not receive the expected turnkey payments in Exhibit 65 below. If these turnkey payments do not materialize, we estimate WSKT will need to raise additional debt of IDR15tn and thus need to incur higher interest expense, which would bring our WSKT’s 2018/19F earnings forecast lower by 24%. Consequently, our fair-value estimate would decline to IDR2,400/share, 9% higher than WSKT’s current share price. This reflects our view that the current WSKT share price implies no turnkey payment nor asset divestments and thus has priced in downside risks we foresee.
Exhibit 65. Sensitivity on WSKT financials if no turnkey payments Base case: with turnkey payment Without turnkey payment % difference IDRbn If these turnkey payments do not materialize, 2018F 2019F 2018F 2019F 2018F 2019F we estimate WSKT will need to raise additional Total receivables 33,353 44,359 49,427 60,400 48% 36% Debt 49,232 68,527 64,232 83,527 30% 22% debt of IDR15tn and thus need to incur higher Debt to equity 130% 146% 174% 186% 34% 27% interest expense Net debt to equity 108% 137% 157% 183% 45% 33% Interest expense 2,560 3,607 3,385 4,432 32% 23% Net profit 4,050 4,313 3,093 3,298 -24% -24% OCF 13,423 806 (1,036) (181)
90 Base case: with turnkey payment Without turnkey payment 80 83.5 68.5 70 64.2 60.4 60 49.2 49.4 50 44.4
40 33.4 30
20 13.4 10 4.1 2.6 3.6 4.3 3.4 3.1 4.4 3.3 0.8 - 2018F 2019F 2018F (1.0) 2019F (0.2) (10) Total receivables Debt Interest expense Net profit OCF Source: Company data, Bahana estimates
Exhibit 66. Sensitivity on WSKT financials if divestment materializes Sold at 1.5x PBV IDRbn Base case: without divestment With divestment % difference 2018F 2019F 2018F 2019F 2018F 2019F Toll road concession rights 56,031 79,239 47,055 70,263 -16% -11% Investment in associates 11,248 14,181 8,772 11,705 -22% -17% Minority interest 20,000 25,065 17,577 22,642 -12% -10% Debt 49,232 68,527 49,232 68,527 0% 0% Equity 17,846 21,754 23,302 27,633 31% 27% Cash 8,309 4,225 22,793 19,133 174% 353% Debt to equity 130% 146% 120% 136% -10% -10% Net debt to equity 108% 137% 65% 98% -43% -39% Net profit 4,050 4,313 9,506 5,282 135% 22% OCF 13,423 806 18,879 1,775 41% 120%
Sold at 1.8x PBV Base case: without divestment With divestment % difference IDRbn 2018F 2019F 2018F 2019F 2018F 2019F Toll road concession rights 56,031 79,239 47,055 70,263 -16% -11% Investment in associates 11,248 14,181 8,772 11,705 -22% -17% Minority interest 20,000 25,065 17,577 22,642 -12% -10% Debt 49,232 68,527 49,232 68,527 0% 0% Equity 17,846 21,754 26,199 30,422 47% 40% Cash 8,309 4,225 25,690 21,921 209% 419% Debt to equity 130% 146% 112% 129% -18% -17% Net debt to equity 108% 137% 54% 88% -54% -50% Net profit 4,050 4,313 12,403 5,463 206% 27% OCF 13,423 806 21,776 1,957 62% 143% Source: Company data, Bahana estimates
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 29
9 January 2018
Initiating coverage with a BUY rating and TP of IDR3,500: WSKT is WSKT is our top pick within Indonesia our top pick within Indonesia construction sector as the company could be construction sector as the company could be the biggest operating cash flow (OCF) turnaround candidate in light of: (1) the biggest operating cash flow (OCF) turnkey project payments and (2) possible asset divestment of its subsidiary turnaround candidate in light of: (1) turnkey Waskita Toll Road (WTR). Given imminent turnkey payments, resulting in project payments and (2) possible asset positive OCF, we view risks for WSKT are now skewed to the upside, hence divestment of its subsidiary Waskita Toll Road we initiate coverage on WSKT with a BUY rating and 12-month target price (WTR). (TP) of IDR3,500 (+52% upside potential), based on an 11.7x PER applied to its 2018F EPS. Our target PER multiple is based on 10% discount to the average PER of global construction companies. WSKT is currently trading at 7.7x 2018F PER or around -1.5STD of its average 5-year PER multiple.
Key downside risks: (1) slower-than-expected cash conversion cycle resulting in higher working capital needs and gearing, leading to an earnings miss, project being delayed and weak balance sheet to win new contracts, and (2) gearing ratio rising above covenant limits.
Where we are versus consensus: Bahana’s 2017-19F EPS estimates are 5%/18%/15% ahead of consensus respectively. We believe the consensus estimates have not factored in: (1) the likely IDR16.1tn turnkey payments from LRT South Sumatra and Sumatra Transmission Line projects and thus (2) lower financing expenses.
Exhibit 67. Our 2017-19F EPS estimate are 5%/18%/15% ahead of consensus We believe the consensus estimates have not 36% 34% 31% factored in: (1) the likely IDR16.1tn turnkey 32% 31% payments from LRT South Sumatra and 28% Sumatra Transmission Line projects and thus 24% (2) lower financing expenses 20% 18% 18% 16% 16% 15% 12% 11% 12% 8% 6% 5% 6% 5% 4% 0% -4% -4% -4% -8% Revenue Gross profit EBIT Pretax profit Net income 2017F 2018F 2019F Source: Bloomberg, Bahana estimates
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 30
9 January 2018
Wijaya Karya
Awaiting HSR disbursement Initiating coverage with a BUY rating and TP of IDR2,200: We initiate Exhibit 68. WIKA key ratios and statistics our coverage on WIKA with a BUY rating and a 12-month target price of Company information Bloomberg/ Reuters code WIKA IJ/WIKA.JK IDR2,200/share (+39% upside potential), based on an 11.7x PER applied to Target price (IDR/share) 2,200 our 2018F EPS. Our PER multiple is derived based on a 10% discount to the Upside/downside (%) 39% Current price (IDR/share) 1,580 average PER of global construction companies. We like WIKA for its (1) 52W range (IDR/share) 1,490-2,590 heavy involvement in national railway projects, which could make it a Share outstanding (mn shares) 8,970 Market capitalization (IDRbn) 14,173 preferred SOE contractor of choice for future railway projects, (2) strong EV, current (IDRbn) 18,948 corporate governance, and (3) relatively healthier balance sheet. WIKA is 3M avg daily turnover (IDRbn) 44 Fiscal Year Ending Dec. 31 16A 17F 18F 19F currently trading at 8.3x 2018F PER or around Bahana EPS (IDR) 113 159 191 244 -1.5STD below its average 5-year PER multiple. Key downside risks: (1) Consensus EPS (IDR) 159 136 166 195 Revenue (IDRbn) 15,669 21,146 33,212 33,799 lower-than-expected margin, (2) further delays in execution of its major EBITDA (IDRbn) 2,362 3,001 4,282 4,896 projects, resulting in lower-than-expected earnings and (3) worse-than- Net profit (IDRbn) 1,012 1,427 1,714 2,190 Ratios: expected cash flow position, resulting in higher-than-expected financing PER (x) 14.0 9.9 8.3 6.5 expenses and thus earnings. PBV (x) 1.2 1.1 1.0 0.9 ROE (%) 8.9% 11.3% 12.2% 13.8% Beneficiary of railway investments in Indonesia: We are of the view EV/EBITDA (x) 8.0 6.3 4.4 3.9 Dividend yield (%) 1.5% 1.4% 2.0% 2.4% that WIKA will be able to secure more infrastructure contracts with the Debt to equity (%) 53.2% 57.3% 71.4% 63.8% Net debt to equity (%) -19.9% 19.5% 46.4% 49.7% railway sector being the key driver for its future growth. Looking back, WIKA Source: Company data, Bloomberg, Bahana estimates demonstrated a high success rate in winning railway contracts: (1) Jakarta- Bandung HSR and (2) Jakarta LRT in addition to its participation as the sub- contractor for Jakarta MRT Phase-1. Nonetheless, WIKA’s share price dropped 34% last year, underperforming the other big SOE contractors and the JCI by 17% and 54% respectively. We think this was partly driven by market concerns on the economic return and profitability of the HSR project in which WIKA has an effective 23% stake. The market seems to perceive WIKA’s Jakarta-Bandung HSR project as an unattractive project given its low IRR and construction margin. We think the concern is already priced into its share price, and assuming it is able to execute its HSR and Jakarta LRT projects properly, WIKA could leverage its position as the preferred SOE contractor of choice for USD36.3bn worth of upcoming railway projects across the country, based on our national project tracker.
Still awaiting HSR loan disbursement: Our conversation with the management suggests that on top of receiving a recommendation letter from the Ministry of Finance, PT Kereta Cepat Indonesia China (KCIC) has submitted the required initial documents to China Development Bank (CDB) for loan disbursement purpose. However, the loan is not yet disbursed given (1) KCIC has to provide additional approval letters from all concession shareholders on the increased EPC contracts value; and (2) longer-than- expected CDB audit process. The HSR investment value has risen from USD5.4bn previously to USD5.9bn, as there is an alteration to the rail routes. All in, we expect CDB to start the loan disbursement in 1Q18F.
Relatively healthier balance sheet: WIKA has a relatively low gearing ratio with a 9M17 debt-to-equity ratio and net debt-to-equity ratio at 66% and 12% respectively. However, we expect WIKA’s gearing ratio to increase to 71% in 2018F, as we expect WIKA has to take additional debt for working capital purposes, following WIKA’s capital injection into KCIC. We are still comfortable with our forecasted gearing ratio as it is still below management’s target of 150% and the SMI’s debt covenant limit of 300%.
Where we are versus consensus: Bahana’s 2017-19F EPS estimates are 14%/11%/23% ahead of consensus as we expect higher operating leverage and lower financing expense for the company.
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9 January 2018
FINANCIAL SUMMARY
Profit and Loss Statement Cash Flow Statement YE Dec. 31 (IDRbn) YE Dec. 31 (IDRbn) 2014 2015 2016 2017F 2018F 2019F 2020F 2014 2015 2016 2017F 2018F 2019F 2020F Infrastructure and building 4,731 5,984 7,476 9,579 9,752 12,169 17,447 Net profit 608 625 1,012 1,427 1,714 2,190 2,837 Energy and industrial plant 3,178 3,370 2,875 2,960 4,816 4,901 5,025 Depreciation 191 272 283 376 591 601 617 Industry (precast - WTON) 3,271 2,830 3,292 4,732 6,800 7,372 7,677 Changes in working capital (701) (808) (3,929) (3,113) (2,531) (404) (489) Realty and property 1,283 1,436 2,026 2,432 3,985 4,225 4,505 Cash flow from operations 98 89 (2,634) (1,310) (227) 2,387 2,965 Manufacturing and trading ------Others (HSR) - - - 1,443 7,859 5,132 - Investment in joint ventures (348) (1) (547) (1,752) (2,251) (1,794) (334) Net sales 12,463 13,620 15,669 21,146 33,212 33,799 34,653 Investment in properties (316) (12) (63) (28) (24) (25) (27) Fixed assets (1,227) (780) (424) (831) (979) (997) (1,022) Gross profit including JO 1,794 1,943 2,606 3,342 4,818 5,440 6,165 Others 584 (19) 361 (1,069) (458) (472) (508) Operating expenses (393) (429) (527) (717) (1,126) (1,146) (1,175) Cash flow from investing (1,307) (812) (672) (3,681) (3,712) (3,288) (1,890) Operating income 1,401 1,514 2,079 2,625 3,692 4,294 4,990 Short & LT debt 1,359 479 3,235 1,136 2,740 (165) (60) Interest income 74 60 51 234 168 104 130 Capital stock 3 - 6,122 - - - - Financing expenses (198) (431) (435) (553) (747) (732) (728) Retained earnings (287) (135) 26 (202) (285) (343) (438) Other income/ (expenses) (138) (44) (99) (115) (148) (170) (197) Others 1,049 639 633 (13) 11 0 1 Pretax profit 1,139 1,098 1,596 2,191 2,965 3,496 4,196 Cash flow from financing 2,124 983 10,016 920 2,465 (507) (498)
Income taxes (395) (395) (448) (605) (950) (967) (992) Net cash flow 914 259 6,710 (4,070) (1,473) (1,409) 577 Minority interest 136 78 135 158 301 340 368 Beginning balance 1,387 2,301 2,560 9,270 5,200 3,727 2,318 Net profit 608 625 1,012 1,427 1,714 2,190 2,837 Ending balance 2,301 2,560 9,270 5,200 3,727 2,318 2,895
Balance sheet Ratio analysis YE Dec. 31 (IDRbn) IDR, %, x
2014 2015 2016 2017F 2018F 2019F 2020F 2014 2015 2016 2017F 2018F 2019F 2020F Cash and cash equivalent 2,301 2,560 9,270 5,200 3,727 2,318 2,895 Per share Account receivables 1,963 2,782 3,751 5,116 8,091 8,196 8,366 EPS (IDR) 68 70 113 159 191 244 316 Retention receivables 568 663 832 1,214 1,430 1,548 1,662 BVPS (IDR) 433 488 1,270 1,407 1,566 1,772 2,039 Gross amount due from customers 2,370 3,244 3,971 6,978 10,628 10,816 11,089 DPS (IDR) 12 11 23 23 32 38 49 Inventories 817 1,031 1,164 1,533 2,426 2,455 2,500 DPR (%) 19% 16% 34% 20% 20% 20% 20% Others 1,462 2,280 4,638 5,125 6,724 6,922 7,162 Current assets 9,481 12,560 23,626 25,166 33,025 32,254 33,673 Growth rates/ margins Investment in JV & associates 1,897 1,898 2,445 4,197 6,447 8,241 8,575 Revenue growth (%) 5% 9% 15% 35% 57% 2% 3% Investment in properties 380 392 455 483 507 533 559 Earnings growth (%) 7% 3% 62% 41% 20% 28% 30% Fixed assets 2,676 3,184 3,325 3,780 4,168 4,564 4,969 EBIT margin (%) 11% 11% 13% 12% 11% 13% 14% Others 1,475 1,568 1,427 2,338 2,495 2,628 2,768 EBITDA margin (%) 13% 13% 15% 14% 13% 14% 16% Total assets 15,909 19,602 31,278 35,964 46,643 48,220 50,544 Dupont analysis ST debt 1,708 1,796 5,961 7,242 10,283 10,543 10,396 Net margin (%) 5% 5% 6% 7% 5% 6% 8% Account payables 3,903 4,323 4,687 6,814 10,781 10,912 11,110 Asset turnover (x) 0.8 0.7 0.5 0.6 0.7 0.7 0.7 Others 2,865 4,479 4,516 4,935 7,745 7,740 7,981 Leverage ratio (x) 4.1 4.5 2.7 2.9 3.3 3.0 2.8 Current liabilities 8,476 10,598 15,163 18,991 28,809 29,195 29,487 ROE (%) 16% 14% 9% 11% 12% 14% 16% LT debt 1,324 1,692 788 593 317 - - Others 1,233 1,874 2,651 2,638 2,648 2,649 2,649 Solvency and liquidity Total liabilities 11,032 14,164 18,603 22,222 31,774 31,843 32,136 Net debt/ equity (%) 15% 17% -20% 20% 46% 50% 41% Minority interest 989 1,063 1,284 1,126 825 485 117 Interest coverage (x) 7.1 3.5 4.8 4.7 4.9 5.9 6.9 Shareholders' equity 3,888 4,375 11,392 12,617 14,045 15,892 18,291 Current ratio (x) 1.1 1.2 1.6 1.3 1.1 1.1 1.1
Other key metrics IDRbn, days, %
2014 2015 2016 2017F 2018F 2019F 2020F New contract (IDRbn) 17,632 25,222 54,763 60,751 49,349 52,932 57,483 Carry over (IDRbn) 23,784 23,301 28,526 60,604 93,623 101,826 108,701 Total orderbook (IDRbn) 41,416 48,523 83,290 121,355 142,972 154,758 166,184 Non-joint operations 28,608 33,183 49,736 78,360 91,288 94,204 99,468 Joint operations 12,808 15,340 33,554 42,995 51,684 60,554 66,716 % y-y total orderbook 8% 17% 72% 46% 18% 8% 7% % y-y new contract -1% 43% 117% 11% -19% 7% 9% Burn rate (%) 42% 35% 24% 23% 29% 30% 31%
Gross margin Infrastructure and building 8% 10% 12% 12% 12% 12% 12% Energy and industrial plant 9% 13% 12% 11% 11% 11% 11% Industry (precast - WTON) 17% 14% 16% 14% 14% 14% 14% Realty and property 18% 17% 23% 21% 21% 21% 21% Manufacturing and trading 0% ------Others (HSR) - - - 8% 8% 8% -
Working capital days Receivables days 147 190 212 241 232 233 233 Payables days 132 135 134 141 141 141 141 Inventory days 27 31 32 30 30 30 30 Cash cycle 42 86 110 130 122 122 123 Source: Company, Bahana estimates
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 32
9 January 2018
Exhibit 69. Orderbook breakdown Exhibit 70. Orderbook burn rate 180,000 175 50%
160,000 150
57,483 57,483 40% 140,000 52,932 52,932 125 37% 120,000 49,349 100 30%
100,000 60,751
IDRtn IDRbn 108,701 108,701 75
80,000 101,826 20% 93,623 93,623
60,000 54,763
25,222 25,222 50
17,632 17,632
17,731 17,731
34,653 34,653 17,675 17,675
33,799 33,799 10% 33,212 33,212 40,000 60,604
13,568 13,568 25
21,146 21,146
10,215 10,215
10,251 10,251
15,669 15,669
8,961 8,961
13,620 13,620
12,463 12,463
11,885 11,885 6,715 6,715
20,000 9,905
7,742 7,742
6,591 6,591
6,559 6,559 6,023 6,023
4,285 4,285 - 0%
28,526 28,526
23,784 23,784
23,301 23,301 20,536 20,536
- 4,384 5,629 7,656 10,616 13,022 16,410
2009 2013 2007 2008 2010 2011 2012 2014 2015 2016
2017F 2018F 2019F 2020F
2015 2007 2008 2009 2010 2011 2012 2013 2014 2016
2017F 2019F 2020F 2018F Revenue Orderbook New contract Revenue Carry-over contract Burn rate (RHS) Avg burn rate, 2007/16 (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 71. Revenue vs. y-y revenue growth Exhibit 72. Revenue breakdown
40,000 70% 100% 4%
6%
7%
8%
10%
10%
11%
6%
13%
13%
14%
15%
7%
34,653
18%
12%
33,799
24%
12% 33,212
60% 5% 35,000 7%
80% 7%
21%
19%
21%
23%
13%
26% 21%
22%
24%
14%
22% 12% 50% 20% 30,000 19%
60% 22%
15%
18%
29%
25%
25%
30%
20% 14%
40% 26%
25,000 15%
21,146 40%
30% 15%
66%
62% 65%
20,000 56%
50%
48%
45%
44%
43% 42%
15,669 20%
39%
38% IDRbn
20% 36%
29%
13,620 12,463
15,000 11,885 10% 0% 9,905 -4%
10,000 7,742
6,591 6,559
6,023 0% -20% 4,285
5,000 -10%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2020F 2017F 2018F 2019F - -20% Infrastructure and building Energy and industrial plant
Industry (precast - WTON) Realty and property
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2018F 2019F 2020F 2017F Manufacturing and trading HSR (excluding WTON portion) Revenue Revenue growth (RHS) Others Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 73. Gross profit vs. gross margin Exhibit 74. EBIT vs. EBIT margin
5,000 16% 6,000 16%
4,657 4,337
4,500 4,990 4,104 14% 14% 5,000 4,000 12% 4,294 12% 3,500 4,000 3,692
3,000 2,749 10% 10% 2,227
2,500 8% 3,000 2,625 8%
IDRbn IDRbn 2,079
2,000 1,655 6% 6% 1,425
1,322 2,000 1,514
1,500 1,401 1,216
958 958 4% 4%
763 763
870 870 633 633
1,000 623 654 654
446 446 1,000
485 485
478 478 359 359
2% 288 2% 500 241
- 0% - 0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2017F 2018F 2019F 2020F 2017F 2018F 2019F 2020F Gross profit Gross margin (RHS) EBIT EBIT margin (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 33
9 January 2018
Exhibit 75. Net profit vs. net margin Exhibit 76. Profitability analysis 3,500 9% 18.0% 16.0%
2,837 8% 3,000 7% 14.0% 2,500 2,190 6% 12.0% 2,000 1,714 1,714 5% 10.0%
1,427 8.0% IDRbn 1,500 4%
1,012 3% 6.0%
1,000
625 625 608 608
570 570 2% 4.0%
476 476 354 354
500 285
189 189 2.0% 156 156
129 129 1%
- 0% 0.0%
2013 2016 2007 2008 2009 2010 2011 2012 2014 2015
2007 2012 2008 2009 2010 2011 2013 2014 2015 2016
2019F 2017F 2018F 2020F
2017F 2019F 2020F 2018F Gross margin EBIT margin Net profit Net margin (RHS) EBITDA margin Net margin Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 77. Return on asset vs. return on equity Exhibit 78. ROA vs. asset turnover 25% 6.0% 6.0% 1.4
5.0% 5.0% 1.2 20% 1.0 4.0% 4.0% 15% 0.8
3.0% 3.0% x 10% 0.6 2.0% 2.0% 0.4 5% 1.0% 1.0% 0.2
0% 0.0% 0.0% -
2010 2015 2007 2008 2009 2011 2012 2013 2014 2016
2011 2014 2007 2008 2009 2010 2012 2013 2015 2016
2017F 2018F 2019F 2020F
2017F 2020F 2018F 2019F ROE ROA (RHS) ROA Asset tunover (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 79. Dupont analysis Exhibit 80. Liquidity analysis 5.0 25% 1.8 0.35 4.5 1.6 0.30 4.0 20% 1.4 3.5 0.25 1.2 3.0 15% 0.20
2.5 1.0
x
x x 2.0 10% 0.8 0.15 1.5 0.6 1.0 5% 0.10 0.4 0.5 0.05 0.2 0.0 0%
- 0.00
2011 2016 2007 2008 2009 2010 2012 2013 2014 2015
2017F 2018F 2019F 2020F
2015 2007 2008 2009 2010 2011 2012 2013 2014 2016
2018F 2019F 2020F Asset turnover Equity multiplier 2017F Net margin (RHS) ROE (RHS) Current ratio Quick ratio Net working capital ratio (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 34
9 January 2018
Exhibit 81. Receivable days vs. receivable-to-revenue Exhibit 82. Due from customers & AR as % of revenue 300 0.7 35% 30%
30% 250 0.6 25% 25% 0.5 20% 200 20% 0.4 15% 150 x 15%
IDRbn 0.3 10% 100 10% 0.2 5% 5% 50 0.1 0% 0%
- -
2011 2014 2007 2008 2009 2010 2012 2013 2015 2016
2017F 2018F 2019F 2020F
2010 2008 2009 2011 2012 2013 2014 2015 2016
2007 Gross amount due from customer as % of revenue
2017F 2018F 2019F 2020F Receivable days Receivable-to-revenue (RHS) Account receivable as % of revenue (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 83. Cash conversion cycle Exhibit 84. Cash flow analysis 300 140 12,000 10,000 250 120 8,000 100 200 6,000 80 4,000
150 days 60 days IDRbn 2,000 100 40 - (2,000) 50 20 (4,000) - -
(6,000)
2010 2007 2008 2009 2011 2012 2013 2014 2015 2016
2018F 2017F 2019F 2020F
2008 2009 2010 2011 2012 2013 2014 2015 2016
2018F 2019F 2020F Receivable days Inventory days 2017F Operating cash flow Investing cash flow Financing cash flow Payable days Cash conversion cycle (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 85. Operating cash flow breakdown Exhibit 86. Capital burden 10,000 12,000 8,000 10,000 6,000 8,000 4,000 6,000 2,000 4,000
- IDRbn (2,000) IDRbn 2,000 (4,000) - (6,000) (2,000) (8,000) (4,000)
(10,000) (6,000)
2012 2008 2009 2010 2011 2013 2014 2015 2016
2009 2014 2008 2010 2011 2012 2013 2015 2016
2020F 2017F 2018F 2019F
2017F 2018F 2019F 2020F EBIT Depreciation Receivables, changes in WC Inventories, changes in WC Investing cash flow Financing cash flow Payables, changes in WC Others Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 35
9 January 2018
Sensitivity analysis (2018F)
Changes in parent-only non-JO new contract growth and burn rate to revenue 2018F
- Parent-only non-JO new contract growth (%) Parent-only non-JO new contract growth (%) -5% 0% 5% 10% 15% 20% 25% -5% 0% 5% 10% 15% 20% 25% 15% 25,803 25,933 26,064 26,194 26,324 26,454 26,584 15% -22.3% -21.9% -21.5% -21.1% -20.7% -20.3% -20.0% 20% 28,012 28,186 28,360 28,533 28,707 28,881 29,054 20% -15.7% -15.1% -14.6% -14.1% -13.6% -13.0% -12.5% 25% 30,222 30,439 30,656 30,873 31,090 31,307 31,524 25% -9.0% -8.4% -7.7% -7.0% -6.4% -5.7% -5.1% 30% 32,431 32,691 32,952 33,212 33,473 33,733 33,994 30% -2.4% -1.6% -0.8% 0.0% 0.8% 1.6% 2.4% 35% 34,640 34,944 35,248 35,552 35,855 36,159 36,463 35% 4.3% 5.2% 6.1% 7.0% 8.0% 8.9% 9.8% 40% 36,849 37,196 37,544 37,891 38,238 38,586 38,933 40% 11.0% 12.0% 13.0% 14.1% 15.1% 16.2% 17.2%
const. burn (%) rate const. burn (%) rate
Parent-only non-JO Parent-only non-JO 45% 39,058 39,449 39,840 40,230 40,621 41,012 41,403 45% 17.6% 18.8% 20.0% 21.1% 22.3% 23.5% 24.7%
Changes in parent only construction gross margin & non-JO burn rate to EPS 2018F
- Parent-only construction gross margin (%) Parent-only construction gross margin (%) 8% 9% 10% 11% 12% 13% 14% 8% 9% 10% 11% 12% 13% 14% 15% 97 102 106 110 115 119 124 15% -49.0% -46.7% -44.5% -42.2% -39.9% -37.6% -35.3% 20% 123 128 133 137 142 147 152 20% -35.6% -33.1% -30.6% -28.1% -25.6% -23.2% -20.7% 25% 149 154 159 164 169 174 180 25% -22.1% -19.4% -16.7% -14.1% -11.4% -8.7% -6.0% 30% 174 180 186 191 197 202 208 30% -8.7% -5.8% -2.9% 0.0% 2.9% 5.8% 8.7% 35% 200 206 212 218 224 230 236 35% 4.8% 7.9% 11.0% 14.1% 17.2% 20.2% 23.3% 40% 226 232 238 245 251 257 264 40% 18.2% 21.5% 24.8% 28.1% 31.4% 34.7% 38.0%
const. burn (%) rate const. burn (%) rate
Parent-only non-JO Parent-only non-JO 45% 252 258 265 272 278 285 292 45% 31.7% 35.2% 38.7% 42.2% 45.7% 49.2% 52.7%
Changes in due from customers and account receivables as % of revenue to total receivables 2018F
- Gross amount due from customers as % of revenue Gross amount due from customers as % of revenue 100% 120% 140% 160% 180% 200% 220% 100% 120% 140% 160% 180% 200% 220% 10% 12,203 13,531 14,860 16,188 17,517 18,845 20,174 10% -42.3% -36.0% -29.7% -23.4% -17.2% -10.9% -4.6% 15% 13,855 15,184 16,512 17,841 19,169 20,497 21,826 15% -34.5% -28.2% -21.9% -15.6% -9.3% -3.1% 3.2% 20% 15,507 16,836 18,164 19,493 20,821 22,150 23,478 20% -26.7% -20.4% -14.1% -7.8% -1.5% 4.8% 11.0% 25% 17,160 18,488 19,817 21,145 22,474 23,802 25,131 25% -18.8% -12.6% -6.3% 0.0% 6.3% 12.6% 18.8%
% of revenue of revenue % 30% 18,812 20,140 21,469 22,797 24,126 25,454 26,783 of revenue % 30% -11.0% -4.8% 1.5% 7.8% 14.1% 20.4% 26.7% 35% 20,464 21,793 23,121 24,450 25,778 27,107 28,435 35% -3.2% 3.1% 9.3% 15.6% 21.9% 28.2% 34.5%
Account as receivable 40% 22,117 23,445 24,774 26,102 27,431 28,759 30,088 Account as receivable 40% 4.6% 10.9% 17.2% 23.4% 29.7% 36.0% 42.3%
Changes in due from customers and account receivables as % of revenue to OCF 2018F
- Gross amount due from customers as % of revenue 100% 120% 140% 160% 180% 200% 220% 10% 9,163 7,772 6,381 4,990 3,599 2,208 817 15% 7,424 6,033 4,642 3,251 1,860 469 (922) 20% 5,686 4,294 2,903 1,512 121 (1,270) (2,661) 25% 3,947 2,556 1,165 (227) (1,618) (3,009) (4,400)
% of revenue of revenue % 30% 2,208 817 (574) (1,965) (3,356) (4,748) (6,139) 35% 469 (922) (2,313) (3,704) (5,095) (6,486) (7,877) Account as receivable 40% (1,270) (2,661) (4,052) (5,443) (6,834) (8,225) (9,616) Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 36
9 January 2018
Valuation bands and movements Forward P/E band P/E movement 7,000 60.0
6,000 32X 50.0 5,000 +2STD 24X 40.0 4,000 +1STD
X 30.0 /share 3,000 16X 23.5X IDR 20.0 2,000 -1STD 8X 10.0 1,000 -2STD
-
Jan-15 Jan-13 Jan-14 Jan-16 Jan-17
- Jan-12
Jan-13 Jan-12 Jan-14 Jan-15 Jan-16 Jan-17
Price 8X 16X 24X 32X P/E Average P/E
Forward P/B band P/B movement 10,000 8.0 6.0X 9,000 7.0 8,000 +2STD 7,000 4.5X 6.0 6,000 5.0 +1STD 5,000 X /share 3.0X 4.0
IDR 4,000 3.3X 3,000 3.0 1.5X 2,000 2.0 1,000 -1STD
1.0
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
- Jan-12
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Price 1.5X 3.0X 4.5X 6.0X P/B Average P/B
Forward EV/EBITDA band EV/EBITDA movement 8,000 21.0 17X 7,000 18.0 +2STD 6,000 15.0 5,000 +1STD 13X 12.0
4,000 X /share 9.9X 9.0 9X IDR 3,000 -1STD 6.0 2,000 -2STD 5X 3.0 1,000
-
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
- Jan-12
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Price 5X 9X 13X 17X EV/EBITDA Average EV/EBITDA
Forward EV/orderbook band P/B ROE 10,000 8.0 24% P/B ROE (RHS) 9,000 .60X 7.0 8,000 6.0 18% 7,000 6,000 .45X 5.0
5,000 /share X 4.0 12%
IDR 4,000 .30X 3.0 3,000 2,000 2.0 6% .15X 1,000 1.0
-
Jan-12 Jan-14 Jan-15 Jan-16 Jan-17
Jan-13 - 0%
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Price .15X .30X .45X .60X
Source: Bloomberg, Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 37
9 January 2018
Pembangunan Perumahan
Strongest balance sheet Initiating coverage with a BUY rating and TP of IDR3,500: We initiate Exhibit 87. PTPP key ratios and statistics our coverage on PTPP with a BUY rating and a 12-month target price of Company information Bloomberg/ Reuters code PTPP IJ/PTPP.JK IDR3,500/share (+32% upside potential), based on 11.7x PER applied to its Target price (IDR/share) 3,500 2018F EPS. Our PER multiple is derived based on a 10% discount to the Upside/downside (%) 32% Current price (IDR/share) 2,660 average PER of global construction companies. We like PPTP for its (1) strong 52W range (IDR/share) 2,250-3,820 position in the ports and power plants segment, (2) strong balance sheet Share outstanding (mn shares) 6,200 Market capitalization (IDRbn) 16,616 and cash flow generation, and (3) margin improvement outlook, counting on EV, current (IDRbn) 17,974 its newly-listed subsidiary PP Presisi (PPRE). PTPP is currently trading at 9x 3M avg daily turnover (IDRbn) 38 Fiscal Year Ending Dec. 31 16A 17F 18F 19F 2018F PER, 10%/20% premium to WIKA and WSKT respectively, though still Bahana EPS (IDR) 165 208 296 374 at around -1.4x STD of its average 5-year PER multiple. Consensus EPS (IDR) 165 227 275 340 Revenue (IDRbn) 16,459 21,271 26,042 30,629 Beneficiary of ports and power plant development: Among the SOE EBITDA (IDRbn) 2,532 3,113 4,163 5,044 Net profit (IDRbn) 1,023 1,292 1,834 2,321 contractors, PTPP is well-known for its strong position in the ports and power Ratios: plant segment. Going forward, based on our national projects tracker, there PER (x) 16.1 12.8 9.0 7.1 PBV (x) 1.7 1.5 1.3 1.1 are approximately USD27bn worth of ports and power plant projects in the ROE (%) 10.4% 11.8% 14.6% 15.9% pipeline or almost 2x value of projects awarded in the past three years. EV/EBITDA (x) 7.1 5.8 4.3 3.6 Dividend yield (%) 0.6% 0.9% 1.2% 1.7% However, we believe the slow execution remains the key issue given PLN’s Debt to equity (%) 62.9% 68.7% 68.9% 63.5% Net debt to equity (%) -21.6% 9.5% 23.7% 33.0% looming balance sheet risks.
Robust balance sheet, allowing more new contract booking: Similar to WIKA, a robust balance sheet and strong cash flow generation are two of PTPP’s key strengths. As of 9M17, PTPP’s gearing and net gearing stood at 66% and 17% respectively, thus the company still has room to gear up going forward. We are comfortable with our PTPP 2018/19F gearing ratio forecast, which we expect to be at 69%/64% respectively. This is still lower than management’s net gearing target of 100%. In addition, we expect PTPP’s 2018/19F liability to equity ratio to be at 2.3x (9M17: 1.8x), still much lower than its debt covenant ceiling of 3.5x.
Margin expansion from its subsidiary PP Presisi: As part of the holding company’s asset recycling strategy, its integrated heavy-equipment-based subsidiary PP Presisi (PPRE) went public on 24 November 2017 and was able to raise IDR1tn by selling a 23% stake. Prior to listing, PPRE had acquired a 51% stake in Lancarjaya Mandiri Abadi (LMA), a general contractor focused on providing earthworks, cut and fill and heavy equipment rental services. PPRE spent approximately IDR798bn for the acquisition, which implies LMA was acquired at 2.1x 2016 PBV. Despite the 100% premium to book value purchase, we think PP Presisi did not overpay for the asset, given that the implied PER of the transaction is at 7.6/4.0x over LMA’s 2017/18F earnings. We expect PP Presisi’s total order book to grow at a 41% CAGR over 2017/19F with an estimated 81% earnings CAGR. We also note that LMA 2017F financials will not be fully consolidated into PP Presisi. According to local accounting standard PSAK 22, given the acquisition only took place in July 2017, LMA’s 1H17 financial numbers should not be consolidated into PP Presisi. Adjusting for this seasonality, PP Presisi’s earnings should still grow at a 56% CAGR over 2017/19F. Given the higher margin profile of PPRE (24% vs. 10-11% PTPP’s main contracting margin) and its growing revenue contribution to the parent (8%/18%/20% for 2017-19F), we expect PTPP’s gross margin to rise from 14.7% in 2017F to 16.5% in 2019F. All in, we expect PTPP to deliver an earnings CAGR of 30% for 2017/20F.
Key downside risks: (1) lower-than-expected new contracts, (2) continued slow execution in the national’s ports and power plants projects and (3) lower-than-expected PPRE margin.
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 38
9 January 2018
FINANCIAL SUMMARY
Profit and Loss Statement Cash Flow Statement YE Dec. 31 (IDRbn) YE Dec. 31 (IDRbn) 2014 2015 2016 2017F 2018F 2019F 2020F 2014 2015 2016 2017F 2018F 2019F 2020F Construction 10,754 11,831 12,376 14,364 17,721 20,184 23,056 Net profit 534 740 1,023 1,292 1,834 2,321 2,836 EPC 1,091 928 2,366 4,680 5,859 7,657 8,795 Depreciation 169 84 564 638 781 919 1,055 Real estates 664 1,601 2,205 2,768 3,099 3,525 4,149 Changes in working capital (1,203) (230) 425 (2,196) (1,500) (1,354) (1,359) Energy - - - 298 365 429 492 Cash flow from operations (501) 595 2,013 (265) 1,115 1,886 2,532 Precast 204 86 380 745 953 1,147 1,352 Others (Equipment, elimination) (286) (228) (868) (1,584) (1,956) (2,313) (2,665) Investment in associates (77) (125) (214) (245) - - - Net sales 12,427 14,217 16,459 21,271 26,042 30,629 35,178 Investment in properties 4 (111) - - - - - Fixed assets (509) (2,364) (1,753) (2,457) (2,507) (2,948) (3,386) Gross profit including JO 1,550 2,007 2,456 3,122 4,175 5,058 5,957 Others (93) 624 (1,494) (625) (421) (461) (526) Operating expenses (281) (410) (487) (648) (793) (933) (1,071) Cash flow from investing (675) (1,975) (3,461) (3,327) (2,928) (3,409) (3,912) Operating income 1,268 1,597 1,968 2,475 3,382 4,126 4,886 Short & LT debt 810 320 2,473 1,294 1,675 395 (132) Interest income 14 31 49 174 148 113 59 Capital stock (0) - 4,384 - - - - Financing expenses (344) (373) (409) (488) (575) (600) (580) Retained earnings (128) (110) (147) (148) (194) (275) (348) Other income/ (expenses) (17) 33 95 14 13 16 21 Others 506 1,787 838 289 (700) - (300) Pretax profit 921 1,288 1,704 2,175 2,968 3,655 4,387 Cash flow from financing 1,187 1,997 7,548 1,435 782 120 (780)
Income taxes (387) (442) (552) (714) (874) (1,028) (1,180) Net cash flow 11 617 6,100 (2,157) (1,031) (1,403) (2,161) Minority interest (0) 105 128 169 260 306 371 Beginning balance 2,397 2,408 3,025 9,125 6,968 5,937 4,534 Net profit 534 740 1,023 1,292 1,834 2,321 2,836 Ending balance 2,408 3,025 9,125 6,968 5,937 4,534 2,373
Balance sheet Ratio analysis YE Dec. 31 (IDRbn) IDR, %, x
2014 2015 2016 2017F 2018F 2019F 2020F 2014 2015 2016 2017F 2018F 2019F 2020F Cash and cash equivalent 2,408 3,025 9,125 6,968 5,937 4,534 2,373 Per share Account receivables 2,300 2,927 4,776 6,542 8,054 9,512 10,960 EPS (IDR) 86 119 165 208 296 374 457 Retention receivables 807 1,180 1,238 1,793 2,188 2,570 2,952 BVPS (IDR) 376 711 1,580 1,765 2,029 2,359 2,760 Gross amount due from customers 4,137 4,721 4,906 7,703 9,439 11,102 12,746 DPS (IDR) 15 20 17 24 31 44 56 Inventories 2,502 2,499 2,656 3,222 3,881 4,538 5,185 DPR (%) 22% 24% 14% 14% 15% 15% 15% Others 1,322 1,077 1,644 2,600 3,108 3,597 4,084 Current assets 13,477 15,431 24,344 28,828 32,607 35,853 38,301 Growth rates/ margins Investment in associates 147 272 486 731 731 731 731 Revenue growth (%) 7% 14% 16% 29% 22% 18% 15% Investment in properties 3 113 113 113 113 113 113 Earnings growth (%) 25% 39% 38% 26% 42% 27% 22% Fixed assets 710 2,989 4,178 5,997 7,722 9,751 12,082 EBIT margin (%) 10% 11% 12% 12% 13% 13% 14% Others 242 354 2,111 2,567 2,728 2,884 3,039 EBITDA margin (%) 12% 12% 15% 15% 16% 16% 17% Total assets 14,579 19,159 31,233 38,237 43,902 49,333 54,266 Dupont analysis ST debt 1,567 1,722 2,548 3,018 4,988 5,866 6,736 Net margin (%) 4% 5% 6% 6% 7% 8% 8% Account payables 6,579 7,372 10,237 13,633 16,420 19,198 21,937 Asset turnover (x) 0.9 0.7 0.5 0.6 0.6 0.6 0.6 Others 1,273 1,677 3,094 3,641 4,009 4,913 4,704 Leverage ratio (x) 6.3 4.3 3.2 3.5 3.5 3.4 3.2 Current liabilities 9,418 10,770 15,879 20,293 25,417 29,977 33,377 ROE (%) 23% 17% 10% 12% 15% 16% 17% LT debt 757 856 1,450 2,728 2,589 1,719 1,436 Others 2,071 2,385 3,108 3,445 2,745 2,745 2,445 Solvency and liquidity Total liabilities 12,246 14,012 20,437 26,465 30,750 34,440 37,257 Net debt/ equity (%) 30% 13% -22% 9% 24% 33% 39% Minority interest 1 737 1,000 832 571 265 - 106 Interest coverage (x) 3.7 4.3 4.8 5.1 5.9 6.9 8.4 Shareholders' equity 2,332 4,410 9,796 10,940 12,581 14,627 17,114 Current ratio (x) 1.4 1.4 1.5 1.4 1.3 1.2 1.1
Other key metrics IDRbn, days, %
2014 2015 2016 2017F 2018F 2019F 2020F New contract (IDRbn) 20,240 27,073 32,628 39,250 43,303 47,781 52,728 Carry over (IDRbn) 22,278 29,867 39,590 50,400 66,096 80,741 94,890 Total orderbook (IDRbn) 42,518 56,940 72,218 89,650 109,399 128,522 147,618 Non-joint operations 85,085 104,167 122,514 140,713 Joint operations 4,565 5,232 6,008 6,905 % y-y total orderbook 20% 34% 27% 24% 22% 17% 15% % y-y new contract 3% 34% 21% 20% 10% 10% 10% Burn rate (%) 29% 25% 23% 26% 26% 26% 26%
Gross margin Construction 11% 11% 11% 12% 14% 14% 15% EPC 13% 22% 15% 14% 14% 14% 14% Real estates 26% 29% 28% 24% 25% 25% 25% Energy - - - -5% -5% 5% 10% Precast 11% 9% 11% 13% 13% 13% 13% Equipment 35% 32% 25% 30% 30% 30% 30%
Working capital days Receivables days 214 227 259 293 293 294 294 Payables days 221 220 267 281 281 281 281 Inventory days 84 75 69 66 66 66 66 Cash cycle 77 81 61 78 79 79 80 Source: Company, Bahana estimates
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 39
9 January 2018
Exhibit 88. Orderbook breakdown Exhibit 89. Orderbook burn rate 160,000 160 60%
140,000 140
50% 52,728 52,728 120,000 120
47,781 47,781 40% 100,000 100 33%
43,303 43,303 80 30%
80,000 IDRtn
94,890 94,890 IDRbn 39,250 39,250 60
60,000 80,741 20%
32,628 32,628 20,240 20,240
66,096 66,096 40
35,178 35,178 19,584 19,584
40,000 30,629
27,073 27,073 19,475 19,475
26,042 26,042 10% 50,400 50,400
21,271 21,271 20
16,459 16,459
12,353 12,353
14,217 14,217
12,427 12,427 39,590 39,590
20,000 11,656
8,621 8,621
8,004 8,004
6,232 6,232
6,054 6,054
4,401 4,401 4,203 4,203 29,867 29,867 - 0%
- 2,504 2,597 6,017 8,200 15,870 22,278
2009 2010 2011 2012 2013 2014 2015 2016
2018F 2017F 2019F 2020F
2014 2009 2010 2011 2012 2013 2015 2016
2018F 2019F 2020F 2017F Revenue Orderbook New contract Revenue Carry-over contract Burn rate (RHS) Avg burn rate, 2009/16 (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 90. Revenue vs. y-y revenue growth Exhibit 91. Revenue breakdown
40,000 50% 100%
9%
5%
35,178 12%
17% 11%
45% 9%
13%
7%
12%
12% 12%
35,000 80% 13% 30,629
40% 14%
23%
22% 25% 30,000 60% 25%
26,042 35%
98%
97%
89% 85%
40% 82%
25,000 87% 83%
21,271 30%
75%
68%
68% 66%
20,000 25% 20% 66%
16,459 IDRbn 14,217 20%
15,000 12,427 0%
11,656
4% 3%
- - 8%
15% -
10% 10%
10% 10%
- -
8,004 8,004 - 10,000 -20% -
6,232 10%
4,401 4,401
4,203
2010 2011 2012 2013 2014 2015 2016
5,000 2009
2017F 2019F 2020F 5% 2018F Construction EPC - 0% Property Real estates
Energy Precast (PP Urban)
2011 2012 2013 2009 2010 2014 2015 2016
2018F 2019F 2020F 2017F Equipment (PP Presisi) Elimination Revenue Revenue growth (RHS) Others Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 92. Gross profit vs. gross margin Exhibit 93. EBIT vs. EBIT margin
7,000 18% 6,000 16% 5,957
16% 4,886 14% 6,000 5,000
5,058 5,058 14% 4,126 12% 5,000
4,175 12% 4,000
3,382 10% 4,000 10%
3,122 3,000 8%
2,475 IDRbn IDRbn 8%
3,000 2,456
1,968 6% 2,007
6% 2,000 1,597 1,550
2,000 1,268 1,281
4% 1,085 4%
855 855
711 711 706 706 1,000 575
1,000 392
368 368 418 418 343 343 2% 2%
- 0% - 0%
2012 2016 2009 2010 2011 2012 2013 2014 2015 2016 2009 2010 2011 2013 2014 2015
2017F 2018F 2019F 2020F 2017F 2018F 2019F 2020F Gross profit Gross margin (RHS) EBIT EBIT margin (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 40
9 January 2018
Exhibit 94. Net profit vs. net margin Exhibit 95. Profitability analysis 3,500 9% 18%
2,848 2,848 8% 3,000 15% 7%
2,500 2,332 6% 12%
2,000 1,843
5% 9% IDRbn 1,500 1,300 4% 6% 1,023 3%
1,000 740 3%
534 534 2%
428 428 310 310
500 240 202 202 163 163 1% 0%
- 0%
2009 2010 2011 2012 2013 2014 2015 2016
2019F 2017F 2018F 2020F
2014 2015 2016 2009 2010 2011 2012 2013
2018F 2019F 2020F 2017F Gross margin EBIT margin Net profit Net margin (RHS) EBITDA margin Net margin Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 96. Return on asset vs. return on equity Exhibit 97. ROA vs. asset turnover 35% 6% 6.0% 1.2
30% 5% 5.0% 1.0
25% 4% 4.0% 0.8 20%
3% 3.0% 0.6 x 15% 2% 2.0% 0.4 10%
5% 1% 1.0% 0.2
0% 0% 0.0% -
2009 2010 2011 2012 2013 2014 2015 2016
2009 2010 2011 2012 2013 2014 2015 2016
2017F 2018F 2019F 2020F
2017F 2018F 2019F 2020F ROE ROA (RHS) ROA Asset tunover (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 98. Dupont analysis Exhibit 99. Liquidity analysis 8.0 35% 1.8 0.30
7.0 30% 1.6 0.25 6.0 1.4 25% 5.0 1.2 0.20 20%
4.0 1.0
x x 15% x 0.15 3.0 0.8 10% 2.0 0.6 0.10 1.0 5% 0.4 0.05 0.0 0% 0.2
- 0.00
2009 2010 2011 2012 2013 2014 2015 2016
2017F 2019F 2018F 2020F
2010 2009 2011 2012 2013 2014 2015 2016
2017F 2019F 2020F Asset turnover Equity multiplier 2018F Net margin (RHS) ROE (RHS) Current ratio Quick ratio Net working capital ratio (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 41
9 January 2018
Exhibit 100. Receivable days vs receivable-to-revenue Exhibit 101. Due from customers & AR as % of revenue 400 0.9 400% 35%
350 0.8 350% 30% 300 0.7 0.6 250 300% 25% 0.5
200 x 250% 20% IDRbn 0.4 150 0.3 200% 15% 100 0.2 50 0.1 150% 10%
- -
2009 2010 2011 2012 2013 2014 2015 2016
2018F 2017F 2019F 2020F
2009 2014 2011 2012 2013 2015 2016
2010 Gross amount due from customer as % of revenue
2017F 2018F 2019F 2020F Receivable days Receivable-to-revenue (RHS) Account receivable as % of revenue (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 102. Cash conversion cycle Exhibit 103. Cash flow analysis 300 100 12,000 10,000 250 80 8,000 200 60 6,000
150 4,000
days days 40
IDRbn 2,000 100 - 20 50 (2,000) - - (4,000)
(6,000)
2010 2016 2009 2011 2012 2013 2014 2015
2017F 2018F 2019F 2020F
2011 2012 2013 2014 2015 2016
Receivable days Inventory days 2010
2020F 2017F 2018F 2019F
Payable days Cash conversion cycle (RHS) Operating cash flow Investing cash flow Financing cash flow Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 104. Operating cash flow breakdown Exhibit 105. Capital burden 8,000 10,000
6,000 8,000
4,000 6,000
2,000 4,000
- 2,000 IDRbn (2,000) IDRbn - (4,000) (2,000) (6,000) (4,000) (8,000)
(6,000)
2015 2010 2011 2012 2013 2014
2016F 2017F 2018F 2019F 2020F
2012 2015 2010 2011 2013 2014 2016
2018F 2019F 2020F EBIT Depreciation 2017F Changes in WC: receivables Changes in WC: Inventories Investing cash flow Financing cash flow Changes in WC: payables Others Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 42
9 January 2018
Sensitivity analysis (2018F)
Changes in non-JO new contract growth and burn rate to revenue 2018F
Non-JO new contract growth (%) Non-JO new contract growth (%) -5% 0% 5% 10% 15% 20% 25% -5% 0% 5% 10% 15% 20% 25% 10% 9,866 10,050 10,233 10,417 10,600 10,784 10,967 10% -62.1% -61.4% -60.7% -60.0% -59.3% -58.6% -57.9% 15% 14,800 15,075 15,350 15,625 15,900 16,175 16,451 15% -43.2% -42.1% -41.1% -40.0% -38.9% -37.9% -36.8% 20% 19,733 20,100 20,467 20,833 21,200 21,567 21,934 20% -24.2% -22.8% -21.4% -20.0% -18.6% -17.2% -15.8% 25% 24,666 25,125 25,583 26,042 26,500 26,959 27,418 25% -5.3% -3.5% -1.8% 0.0% 1.8% 3.5% 5.3% 30% 29,599 30,150 30,700 31,250 31,800 32,351 32,901 30% 13.7% 15.8% 17.9% 20.0% 22.1% 24.2% 26.3%
burn (%) rate burn (%) rate 35% 34,533 35,175 35,817 36,459 37,101 37,743 38,385 35% 32.6% 35.1% 37.5% 40.0% 42.5% 44.9% 47.4% Non-JO construction 40% 39,466 40,200 40,933 41,667 42,401 43,134 43,868 Non-JO construction 40% 51.5% 54.4% 57.2% 60.0% 62.8% 65.6% 68.5%
Changes in construction gross margin & non-JO rburn rate to EPS 2018F
Construction gross margin (%) Construction gross margin (%) 7% 8% 9% 10% 11% 12% 13% 7% 8% 9% 10% 11% 12% 13% 10% 262 270 279 288 296 305 314 10% -12.0% -9.1% -6.1% -3.2% -0.3% 2.6% 5.5% 15% 252 265 278 291 304 317 330 15% -15.3% -10.9% -6.6% -2.2% 2.2% 6.5% 10.9% 20% 242 259 276 293 311 328 345 20% -18.8% -12.9% -7.1% -1.3% 4.5% 10.3% 16.2% 25% 231 253 274 296 318 339 361 25% -22.3% -15.0% -7.7% -0.5% 6.8% 14.1% 21.4% 30% 220 246 272 298 324 350 376 30% -25.8% -17.1% -8.4% 0.4% 9.1% 17.8% 26.5%
burn (%) rate burn (%) rate 35% 210 240 270 301 331 361 392 35% -29.4% -19.2% -9.0% 1.1% 11.3% 21.5% 31.7% Non-JO construction 40% 199 234 268 303 338 372 407 Non-JO construction 40% -33.0% -21.3% -9.7% 1.9% 13.6% 25.2% 36.9%
Changes in due from customers and account receivables as % of revenue to total receivables 2018F
Gross amount due from customers as % of revenue Gross amount due from customers as % of revenue 220% 270% 320% 370% 420% 470% 520% 220% 270% 320% 370% 420% 470% 520% 24% 14,683 15,981 17,279 18,577 19,875 21,173 22,472 24% -29.8% -23.6% -17.4% -11.2% -5.0% 1.2% 7.4% 27% 15,465 16,764 18,062 19,360 20,658 21,956 23,254 27% -26.1% -19.9% -13.7% -7.5% -1.3% 4.9% 11.1% 30% 16,248 17,546 18,845 20,143 21,441 22,739 24,037 30% -22.4% -16.1% -9.9% -3.7% 2.5% 8.7% 14.9% 33% 17,031 18,329 19,627 20,926 22,224 23,522 24,820 33% -18.6% -12.4% -6.2% 0.0% 6.2% 12.4% 18.6%
% of revenue of revenue % 36% 17,814 19,112 20,410 21,708 23,007 24,305 25,603 of revenue % 36% -14.9% -8.7% -2.5% 3.7% 9.9% 16.1% 22.4% 39% 18,597 19,895 21,193 22,491 23,789 25,088 26,386 39% -11.1% -4.9% 1.3% 7.5% 13.7% 19.9% 26.1%
Account as receivable 42% 19,379 20,678 21,976 23,274 24,572 25,870 27,169 Account as receivable 42% -7.4% -1.2% 5.0% 11.2% 17.4% 23.6% 29.8%
Changes in due from customers and account receivables as % of revenue to OCF 2018F
- Gross amount due from customers as % of revenue 220% 270% 320% 370% 420% 470% 520% 24% 7,214 5,868 4,523 3,177 1,831 486 (860) 27% 6,438 5,092 3,746 2,401 1,055 (291) (1,636) 30% 5,661 4,316 2,970 1,624 279 (1,067) (2,413) 33% 4,885 3,539 2,194 848 (498) (1,843) (3,189)
% of revenue of revenue % 36% 4,109 2,763 1,417 72 (1,274) (2,620) (3,965) 39% 3,332 1,987 641 (705) (2,050) (3,396) (4,742) Account as receivable 42% 2,556 1,210 (135) (1,481) (2,827) (4,172) (5,518) Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 43
9 January 2018
Valuation bands and movements Forward P/E band P/E movement 10,000 35.0 9,000 29X 30.0 8,000 +2STD 7,000 25.0 22X +1STD 6,000 20.0
5,000 X 17.0X /share 15X 15.0
IDR 4,000 -1STD 3,000 10.0 8X 2,000 5.0 -2STD 1,000
-
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
- Jan-12
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Price 8X 15X 22X 29X P/E Average P/E
Forward P/B band P/B movement 12,000 6.0
4.8X 10,000 5.0 +2STD 8,000 3.6X 4.0 +1STD
6,000 X /share
2.4X 3.0 IDR 4,000 2.7X 1.2X 2.0 2,000 -1STD
1.0
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
- Jan-12
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Price 1.2X 2.4X 3.6X 4.8X P/B Average P/B
Forward EV/EBITDA band EV/EBITDA movement 10,000 15.0 9,000 14X 8,000 12.0 +2STD 7,000 10X +1STD 6,000 9.0
5,000 X
/share 7.2X 6.0
IDR 4,000 6X -1STD 3,000 3.0 2,000 -2STD 1,000 2X
-
Jan-15 Jan-13 Jan-14 Jan-16 Jan-17
- Jan-12
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Price 2X 6X 10X 14X EV/EBITDA Average EV/EBITDA
Forward EV/orderbook band P/B ROE 7,000 6.0 30% .4X P/B ROE (RHS) 6,000 5.0 24% 5,000 .3X 4.0
4,000 18% /share X 3.0 3,000 .2X IDR 12% 2,000 2.0
.1X 6% 1,000 1.0
-
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-12 - 0%
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Price .1X .2X .3X .4X
Source: Bloomberg, Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 44
9 January 2018
Adhi Karya
All clear!
Initiating coverage with a BUY rating and TP of IDR2,400: Exhibit 106. ADHI key ratios and statistics Considering that there is clarity on ADHI’s role in the Greater Jakarta project Company information Bloomberg/ Reuters code ADHI IJ/ADHI.JK and the syndicated loan arrangement for Kereta Api Indonesia (KAI) has Target price (IDR/share) 2,400 been completed, we think the overhang on the stock has been lifted. Thus, Upside/downside (%) 28% Current price (IDR/share) 1,880 we initiate our coverage on ADHI with a BUY rating and a 12-month target 52W range (IDR/share) 1,705-2,470 price of IDR2,400/share (+28% upside potential), based on an 11.7x PER Share outstanding (mn shares) 3,561 Market capitalization (IDRbn) 6,748 applied to our 2018F EPS. Our PER multiple is derived based on a 10% EV, current (IDRbn) 11,182 discount to the average PER of global construction companies. ADHI is 3M avg daily turnover (IDRbn) 38 currently trading at 9.3x 2018F PER, 14%/22% premiums to WIKA and Fiscal Year Ending Dec. 31 16A 17F 18F 19F WSKT respectively, though still at around -1.4x STD of its average 5-year Bahana EPS (IDR) 88 156 201 243 Consensus EPS (IDR) 88 145 215 257 PER multiple. Revenue (IDRbn) 11,064 15,288 19,044 20,989 EBITDA (IDRbn) 786 1,396 1,894 2,139 Done deal: On 8 December 2017, at a government press conference, the Net profit (IDRbn) 313 556 717 866 final scheme for Greater Jakarta LRT project was revealed. Total cost of the Ratios: PER (x) 21.4 12.0 9.3 7.7 project is IDR29.9tn (IDR5.8tn for rolling stock, IDR22.6tn for infrastructure PBV (x) 1.2 1.1 1.0 0.9 – depot, signalling and railways, and IDR1.5tn to cover for interest cost ROE (%) 5.8% 9.4% 11.1% 12.2% EV/EBITDA (x) 14.2 8.0 5.9 5.2 during construction period). Instead of the earlier proposed joint-venture Dividend yield (%) 1.4% 1.4% 2.5% 3.2% scheme, ADHI will not have a direct stake in the Greater Jakarta LRT project. Debt to equity (%) 78.5% 124.5% 135.5% 122.4% Net debt to equity (%) 16.7% 62.9% 96.3% 98.2% However, ADHI has to spend around IDR4.2tn to invest in the project’s depot and stations with the funding expected from (1) IDR1.4tn state capital injection the company had received back in 2015 and (2) the remaining IDR2.8tn from a syndicated bank loan facility with an estimated cost of funding at 8.25% per annum and no government guarantee. KAI, as the main investor, will have to shoulder IDR25.7tn worth of investment (rolling stock, railways and signaling). KAI’s funding will come from (1) IDR7.6tn state capital injection and (2) the remaining IDR18.1tn from the syndicated bank loan facility with 8.25% interest per annum and a government guarantee. KAI will also receive IDR14tn worth of government subsidies over the next 12 years to help cover the ticket price.
First payment from KAI to ADHI is expected by mid-January 2018: As of 9M17, IDR4.3tn worth of LRT receivables were there in ADHI’s balance sheet. This accounts for a third of ADHI’s overall receivables. On 29 December 2017, KAI signed a syndicated loan agreement with 12 banks. The loan agreement is worth IDR19.3tn, comprising IDR18.1tn of investment credit and IDR1.2tn worth of working capital loan. The lending contract has a grace period of 18 years. In addition, KAI also announced that the company will pay ADHI’s LRT receivable by mid-January 2018. Going forward, ADHI will get paid on a quarterly basis based on the project’s construction progress.
Unlocking value from TOD property projects: Our discussion with ADHI revealed that the company plans to develop transit-oriented development (TOD) property projects in 19 integrated locations across the Greater Jakarta area, which will be labelled under the brand name LRT City. Total area needed for the LRT City is 57 hectares. As of 9M17, the company had acquired 27 hectares with total capex of IDR800bn and the remaining 30 hectares will be acquired this year using a total budget of IDR1.2tn. We are positive on ADHI’s TOD plans as it generates approximately 30% gross margin compared to 10-13% for the construction segment.
Key downside risks: (1) lower-than-expected margin, (2) further delays in LRT payment and execution, (3) weak property demand, resulting in failure to unlock TOD value.
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 45
9 January 2018
FINANCIAL SUMMARY
Profit and Loss Statement Cash Flow Statement YE Dec. 31 (IDRbn) YE Dec. 31 (IDRbn) 2014 2015 2016 2017F 2018F 2019F 2020F 2014 2015 2016 2017F 2018F 2019F 2020F Construction 6,767 7,994 9,202 9,016 9,624 13,791 19,939 Net profit 329 464 313 556 717 866 1,169 EPC 863 636 998 518 558 802 1,159 Depreciation 25 32 58 59 73 81 89 Real estates 195 611 671 622 726 1,042 1,507 Changes in working capital (1,142) (103) (1,195) (2,144) 1,809 (688) (324) Investment 165 149 192 207 257 401 580 Cash flow from operations (788) 393 (824) (1,529) 2,599 259 935 Property 664 ------Others (LRT, TOD) - - - 4,925 7,880 4,953 - Investment in joint ventures (311) (4) 32 (66) (40) (44) (49) Net sales 8,654 9,390 11,064 15,288 19,044 20,989 23,185 Investment in properties (160) 26 (25) 5 (4,200) - - Fixed assets (250) (635) (418) (457) (569) (627) (693) Gross profit including JO 1,009 1,007 1,185 1,987 2,631 2,951 3,420 Others 22 (194) (836) (663) (124) (134) (144) Operating expenses (356) (395) (456) (650) (810) (893) (986) Cash flow from investing (699) (808) (1,247) (1,181) (4,934) (805) (886) Operating income 653 611 729 1,337 1,820 2,058 2,434 Short & LT debt 560 849 1,279 3,200 1,397 (56) (273) Interest income 33 51 163 109 76 51 37 Capital stock - 2,714 1 - - - - Financing expenses (137) (137) (258) (373) (538) (536) (521) Retained earnings (210) (100) (79) (94) (167) (215) (260) Other income/ (expenses) 49 221 (21) (87) (107) (118) (130) Others 8 457 (82) (125) - - - Pretax profit 600 746 613 986 1,252 1,456 1,820 Cash flow from financing 358 3,921 1,118 2,981 1,230 (271) (533)
Income taxes (268) (281) (298) (428) (533) (588) (649) Net cash flow (1,129) 3,506 (952) 271 (1,105) (817) (484) Minority interest 3 1 2 2 2 2 2 Beginning balance 1,940 811 4,317 3,365 3,636 2,531 1,714 Net profit 329 464 313 556 717 866 1,169 Ending balance 811 4,317 3,365 3,636 2,531 1,714 1,230
Balance sheet Ratio analysis YE Dec. 31 (IDRbn) IDR, %, x 2014 2015 2016 2017F 2018F 2019F 2020F 2014 2015 2016 2017F 2018F 2019F 2020F Cash and cash equivalent 811 4,317 3,365 3,636 2,531 1,714 1,230 Per share Account receivables 1,954 2,232 2,907 3,015 4,042 4,417 4,842 EPS (IDR) 92 130 88 156 201 243 328 Retention receivables 942 1,080 1,064 1,365 1,407 1,449 1,492 BVPS (IDR) 459 1,447 1,526 1,656 1,810 1,993 2,248 Gross amount due from customers 2,617 3,093 5,831 9,057 7,179 7,905 8,726 DPS (IDR) 34 26 26 26 47 60 73 Inventories 132 163 131 2,979 3,675 4,040 4,438 DPR (%) 30% 28% 20% 30% 30% 30% 30% Others 2,710 3,807 3,537 2,308 2,729 2,955 3,209 Current assets 9,166 14,691 16,835 22,360 21,564 22,481 23,937 Growth rates/ margins Investment in joint venture 364 368 336 403 443 487 536 Revenue growth (%) -12% 9% 18% 38% 25% 10% 10% Investment in properties 356 330 355 349 4,549 4,549 4,549 Earnings growth (%) -20% 41% -32% 77% 29% 21% 35% Fixed assets 496 1,099 1,460 1,858 2,353 2,900 3,503 EBIT margin (%) 8% 7% 7% 9% 10% 10% 10% Others 77 273 1,109 1,771 1,894 2,026 2,169 EBITDA margin (%) 8% 7% 7% 9% 10% 10% 11% Total assets 10,459 16,761 20,095 26,741 30,803 32,443 34,694 Dupont analysis ST debt 658 1,115 2,844 3,308 2,154 2,592 2,318 Net margin (%) 4% 5% 3% 4% 4% 4% 5% Account payables 4,923 6,489 8,373 10,726 12,251 12,987 14,264 Asset turnover (x) 0.8 0.6 0.6 0.6 0.6 0.6 0.7 Others 1,459 1,810 1,828 2,584 3,176 3,486 3,825 Leverage ratio (x) 6.4 3.3 3.7 4.5 4.8 4.6 4.3 Current liabilities 7,041 9,414 13,044 16,618 17,581 19,064 20,408 ROE (%) 20% 9% 6% 9% 11% 12% 15% LT debt 1,611 2,003 1,428 4,040 6,590 6,097 6,097 Others 166 181 180 180 180 180 180 Solvency and liquidity Total liabilities 8,818 11,599 14,653 20,838 24,351 25,342 26,685 Net debt/ equity (%) 89% -23% 17% 63% 96% 98% 90% Minority interest 7 8 10 8 6 5 3 Interest coverage (x) 4.8 4.5 2.8 3.6 3.4 3.8 4.7 Shareholders' equity 1,634 5,154 5,433 5,895 6,446 7,097 8,006 Current ratio (x) 1.3 1.6 1.3 1.3 1.2 1.2 1.2
Other key metrics IDRbn, days, %
2014 2015 2016 2017F 2018F 2019F 2020F New contract (IDRbn) 9,217 13,962 16,500 37,850 19,965 21,962 24,158 Carry over (IDRbn) 8,667 7,758 12,011 16,769 36,327 35,999 35,533 Total orderbook (IDRbn) 17,884 21,720 28,511 54,619 56,292 57,960 59,691 Non-joint operations 16,421 18,878 24,338 49,309 50,048 50,769 51,522 Joint operations 1,463 2,842 4,173 5,309 6,244 7,191 8,169 % y-y total orderbook -11% 21% 31% 92% 3% 3% 3% % y-y new contract -15% 51% 18% 129% -47% 10% 10% Burn rate (%) 50% 45% 41% 30% 36% 39% 42%
Gross margin Construction 10% 11% 14% 13% 13% 13% 13% EPC -1% -16% -41% -45% -30% -10% 10% Real estates 31% 30% 30% 26% 26% 26% 26% Investment 21% 22% 12% 20% 20% 20% 20% Property 37% ------Others - - - 15% 15% 15% -
Working capital days Receivables days 234 249 324 321 242 240 237 Payables days 245 291 316 299 278 268 268 Inventory days 6 7 5 81 81 81 81 Cash cycle (5) (35) 13 103 46 53 51 Source: Company, Bahana estimates
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 46
9 January 2018
Exhibit 107. Orderbook breakdown Exhibit 108. Orderbook burn rate 70,000 70 80%
70% 60,000 60 60% 50
50,000 24,158 21,962 21,962
19,965 19,965 50% 37,850 37,850 40 47% 40,000 40% IDRtn 30
IDRbn 30,000 30%
36,327 36,327
35,999 35,999
23,185 23,185 35,533 35,533
20,989 20,989 20
19,044 19,044 20%
20,000 16,500 15,288 15,288 10
11,064 11,064 10%
9,800 9,800
9,390 9,390
13,962 13,962
11,864 11,864
8,654 8,654
10,563 10,563
10,033 10,033
7,715 7,715
7,628 7,628
10,854 10,854
9,217 9,217 6,695 6,695
10,000 6,640
5,675 5,675
8,114 8,114 16,769 16,769
6,626 6,626 - 0%
12,011 12,011
9,787 9,787
10,385 10,385
9,218 9,218
9,134 9,134
7,758 7,758
8,667 8,667 6,884 6,884
- 5,750
2011 2014 2008 2009 2010 2012 2013 2015 2016
2017F 2018F 2019F 2020F
2012 2008 2009 2010 2011 2013 2014 2015 2016
2017F 2019F 2020F 2018F Revenue Orderbook New contract Revenue Carry-over contract Burn rate (RHS) Avg burn rate, 2008/16 (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 109. Revenue vs. y-y revenue growth Exhibit 110. Revenue breakdown
25,000 50% 100% 2% 2% 2%
3% 3%
4%
3%
4%
5%
5%
8%
5%
6%
7%
23,185
7%
5%
2%
2% 20,989 5% 2%
40% 90% 12%
2%
7%
5%
19,044
11%
9% 24%
20,000 19%
32% 10%
30% 80% 19% 41%
15,288 2%
20% 5% 15,000 70%
1%
4% 4%
11,064 10%
94%
9,800 3%
60% 92%
90% 9,390
IDRbn 1%
86%
8,654 8,654
86%
85% 83%
10,000 83%
4% 7,715
7,628 0%
78%
77%
3%
6,695 6,695 6,640
50% 74%
5,675 66% 4,974 4,974 -10% 5,000 59%
40% 51% -20% 30%
- -30%
2012 2007 2008 2009 2010 2011 2013 2014 2015 2016
2019F 2017F 2018F 2020F
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2020F 2018F 2019F 2017F Construction EPC Real estates Revenue Revenue growth (RHS) Investment Property Others (LRT) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 111. Gross profit vs. gross margin Exhibit 112. EBIT vs. EBIT margin
3,500 16% 3,000 12%
3,216 2,434
2,807 14%
3,000 2,500 10% 2,506 2,506
12% 2,058 2,500
2,000 1,820 8% 10% 2,000 1,881
8% 1,500 1,337 6% IDRbn
IDRbn 1,500
1,193 1,115
6% 918
998 998
975 975 956 956
1,000 790 4%
729 729 653 653
1,000 734
611 611
711 711
655 655
556 556 551 551
4% 537
544 544
457 457 368 368
500 291 2% 500 2%
- 0% - 0%
2008 2011 2014 2012 2007 2009 2010 2012 2013 2015 2016 2007 2008 2009 2010 2011 2013 2014 2015 2016
2017F 2018F 2019F 2020F 2017F 2018F 2019F 2020F Gross profit Gross margin (RHS) EBIT EBIT margin (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 47
9 January 2018
Exhibit 113. Net profit vs. net margin Exhibit 114. Profitability analysis
1,400 6% 15% 1,169 1,200 5% 12% 1,000 866 866 4% 9%
800 717
3% 556 556
IDRbn 600 6% 464 464
412 412 2% 329 329
400 313 3%
212 212
189 189 182 182 166 166 1%
200 112 81 81 0%
- 0%
2010 2013 2016 2008 2009 2011 2012 2014 2015
2019F 2017F 2018F 2020F
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2018F 2019F 2020F 2017F Gross margin EBIT margin Net profit Net margin (RHS) EBITDA margin Net margin Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 115. Return on asset vs. return on equity Exhibit 116. ROA vs. asset turnover 30% 5% 4.5% 1.6
4.0% 1.4 25% 4% 3.5% 1.2 20% 3.0% 3% 1.0 2.5%
15% 0.8 x 2.0% 2% 0.6 10% 1.5% 0.4 1% 1.0% 5% 0.5% 0.2
0% 0% 0.0% -
2008 2009 2010 2011 2012 2013 2014 2015 2016
2009 2014 2007 2008 2010 2011 2012 2013 2015 2016
2017F 2018F 2019F 2020F
2019F 2017F 2018F 2020F ROE ROA (RHS) ROA Asset tunover (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 117. Dupont analysis Exhibit 118. Liquidity analysis 10.0 30% 1.8 0.35 9.0 1.6 25% 0.30 8.0 1.4 7.0 0.25 20% 1.2 6.0 0.20
5.0 15% 1.0
x
x x 4.0 0.8 0.15 10% 3.0 0.6 0.10 2.0 5% 0.4 1.0 0.05 0.2 0.0 0%
- 0.00
2014 2016 2007 2008 2009 2010 2011 2012 2013 2015
2017F 2018F 2019F 2020F
2008 2010 2012 2014 2016 2009 2011 2013 2015
2018F 2020F 2019F Asset turnover Equity multiplier 2017F Net margin (RHS) ROE (RHS) Current ratio Quick ratio Net working capital ratio (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 48
9 January 2018
Exhibit 119. Receivable days vs receivable-to-revenue Exhibit 120. Due from customers & AR as % of revenue 500 1.0 70% 30% 450 0.9 60% 25% 400 0.8 50% 350 0.7 20% 300 0.6 40% 15%
250 0.5 x 30% IDRbn 200 0.4 10% 20% 150 0.3 5% 100 0.2 10% 50 0.1 0% 0%
- -
2011 2014 2007 2008 2009 2010 2012 2013 2015 2016
2017F 2018F 2019F 2020F
2012 2008 2009 2010 2011 2013 2014 2015 2016
2007 Gross amount due from customer as % of revenue
2017F 2018F 2019F 2020F Receivable days Receivable-to-revenue (RHS) Account receivable as % of revenue (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 121. Cash conversion cycle Exhibit 122. Cash flow analysis 350 120 6,000 100 300 4,000 80 250 60 2,000
200 40 days
150 20 days - IDRbn - 100 (2,000) (20) 50 (40) (4,000) - (60)
(6,000)
2015 2007 2008 2009 2010 2011 2012 2013 2014 2016
2017F 2018F 2019F 2020F
2014 2015 2008 2009 2010 2011 2012 2013 2016
2018F 2019F 2020F Receivable days Inventory days 2017F Payable days Cash conversion cycle (RHS) Operating cash flow Investing cash flow Financing cash flow Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 123. Operating cash flow breakdown Exhibit 124. Capital burden 6,000 5,000 4,000 4,000 3,000 2,000 2,000 - 1,000 -
IDRbn (2,000)
(1,000) IDRbn (4,000) (2,000) (3,000) (6,000) (4,000) (8,000) (5,000)
(6,000)
2008 2009 2010 2011 2012 2013 2014 2015 2016
2017F 2018F 2019F 2020F
EBIT Depreciation
2012 2015 2008 2009 2010 2011 2013 2014 2016
2018F 2019F 2020F Changes in WC: receivables Changes in WC: Inventories 2017F Investing cash flow Financing cash flow Changes in WC: payables Others Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 49
9 January 2018
Sensitivity analysis (2018F)
Changes in non-JO new contract growth and burn rate to revenue 2018F
Non-JO new contract growth (%) Non-JO new contract growth (%) -5% 0% 5% 10% 15% 20% 25% -5% 0% 5% 10% 15% 20% 25% 15% 13,095 13,217 13,340 13,462 13,585 13,707 13,830 15% -31.2% -30.6% -30.0% -29.3% -28.7% -28.0% -27.4% 20% 14,833 14,996 15,160 15,323 15,486 15,650 15,813 20% -22.1% -21.3% -20.4% -19.5% -18.7% -17.8% -17.0% 25% 16,571 16,775 16,979 17,184 17,388 17,592 17,796 25% -13.0% -11.9% -10.8% -9.8% -8.7% -7.6% -6.6% 30% 18,309 18,554 18,799 19,044 19,289 19,534 19,779 30% -3.9% -2.6% -1.3% 0.0% 1.3% 2.6% 3.9% 35% 20,048 20,333 20,619 20,905 21,191 21,477 21,763 35% 5.3% 6.8% 8.3% 9.8% 11.3% 12.8% 14.3%
burn (%) rate burn (%) rate 40% 21,786 22,112 22,439 22,766 23,093 23,419 23,746 40% 14.4% 16.1% 17.8% 19.5% 21.3% 23.0% 24.7% Non-JO construction 45% 23,524 23,892 24,259 24,627 24,994 25,362 25,729 Non-JO construction 45% 23.5% 25.5% 27.4% 29.3% 31.2% 33.2% 35.1%
Changes in construction gross margin & non-JO burn rate to EPS 2018F
Construction gross margin (%) Construction gross margin (%) 10% 11% 12% 13% 14% 15% 16% 10% 11% 12% 13% 14% 15% 16% 15% 103 117 131 144 158 172 185 15% -48.7% -41.9% -35.1% -28.3% -21.6% -14.8% -8.0% 20% 109 127 145 163 182 200 218 20% -46.0% -37.0% -27.9% -18.9% -9.8% -0.8% 8.2% 25% 114 137 160 182 205 228 251 25% -43.3% -32.0% -20.7% -9.4% 1.9% 13.2% 24.5% 30% 119 147 174 201 229 256 283 30% -40.7% -27.1% -13.6% 0.0% 13.6% 27.1% 40.7% 35% 125 157 189 220 252 284 316 35% -38.0% -22.2% -6.4% 9.4% 25.3% 41.1% 56.9%
burn (%) rate burn (%) rate 40% 130 167 203 239 276 312 349 40% -35.4% -17.3% 0.8% 18.9% 37.0% 55.0% 73.1% Non-JO construction 45% 136 177 217 258 299 340 381 Non-JO construction 45% -32.7% -12.4% 8.0% 28.3% 48.7% 69.0% 89.4%
Changes in due from customers and account receivables as % of revenue to total receivables 2018F
Gross amount due from customers as % of revenue Gross amount due from customers as % of revenue 180% 200% 220% 240% 260% 280% 300% 180% 200% 220% 240% 260% 280% 300% 17% 9,699 10,307 10,915 11,523 12,131 12,739 13,346 17% -23.3% -18.5% -13.7% -8.9% -4.1% 0.7% 5.5% 19% 10,074 10,682 11,290 11,898 12,506 13,114 13,722 19% -20.4% -15.5% -10.7% -5.9% -1.1% 3.7% 8.5% 21% 10,449 11,057 11,665 12,273 12,881 13,489 14,097 21% -17.4% -12.6% -7.8% -3.0% 1.8% 6.6% 11.5% 23% 10,825 11,432 12,040 12,648 13,256 13,864 14,472 23% -14.4% -9.6% -4.8% 0.0% 4.8% 9.6% 14.4%
% of revenue of revenue % 25% 11,200 11,808 12,416 13,023 13,631 14,239 14,847 of revenue % 25% -11.5% -6.6% -1.8% 3.0% 7.8% 12.6% 17.4% 27% 11,575 12,183 12,791 13,399 14,006 14,614 15,222 27% -8.5% -3.7% 1.1% 5.9% 10.7% 15.5% 20.4%
Account as receivables 29% 11,950 12,558 13,166 13,774 14,382 14,990 15,597 Account as receivables 29% -5.5% -0.7% 4.1% 8.9% 13.7% 18.5% 23.3%
Changes in due from customers and account receivables as % of revenue to OCF 2018F
Gross amount due from customers as % of revenue 180% 200% 220% 240% 260% 280% 300% 17% 5,668 5,040 4,411 3,783 3,155 2,527 1,898 19% 5,273 4,645 4,017 3,388 2,760 2,132 1,504 21% 4,879 4,250 3,622 2,994 2,366 1,737 1,109 23% 4,484 3,856 3,227 2,599 1,971 1,343 714
% of revenue of revenue % 25% 4,089 3,461 2,833 2,205 1,576 948 320 27% 3,695 3,066 2,438 1,810 1,182 553 (75)
Account as receivables 29% 3,300 2,672 2,044 1,415 787 159 (470) Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 50
9 January 2018
Valuation bands and movements Forward P/E band P/E movement 7,000 35.0 32X 6,000 30.0 +2STD 5,000 25.0 24X +1STD 4,000 20.0
X 17.5X
/share 16X 3,000 15.0 IDR -1STD 2,000 10.0 8X -2STD 1,000 5.0
-
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
- Jan-12
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Price 8X 16X 24X 32X P/E Average P/E
Forward P/B band P/B movement 16,000 8.0
14,000 7.5X 7.0
12,000 6.0 10,000 5.5X 5.0 +2STD
8,000 X /share 4.0
IDR +1STD 6,000 3.0X 3.0 4,000 2.3X 2.0 2,000 1.0X
1.0
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
- Jan-12
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Price 1.0X 3.0X 5.5X 7.5X P/B Average P/B
Forward EV/EBITDA band EV/EBITDA movement 7,000 18.0 15.5X +2STD 6,000 15.0 5,000 +1STD 12.0 4,000 11.0X
X 9.0 9.3X /share 3,000 IDR 6.0 -1STD 2,000 6.5X 3.0 1,000 -2STD
2.0X -
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
- Jan-12
Jan-13 Jan-12 Jan-14 Jan-15 Jan-16 Jan-17
Price 2.0X 6.5X 11.0X 15.5X EV/EBITDA Average EV/EBITDA
Forward EV/orderbook band P/B ROE 10,000 8.0 30% P/B ROE (RHS) 9,000 .65X 7.0 8,000 24% 6.0 7,000 6,000 5.0 .45X 18%
5,000 /share X 4.0
IDR 4,000 3.0 12% 3,000 2,000 .25X 2.0 6% 1,000 1.0
- .10X
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-12 - 0%
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Price .10X .25X .45X .65X
Source: Bloomberg, Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 51
9 January 2018
Waskita Beton Precast
Concrete player
Initiating coverage with a BUY rating and TP of IDR645: We initiate Exhibit 125. WSBP key ratio and statistics Company information coverage on Waskita Beton Precast with a BUY rating and a 12-month target Bloomberg/ Reuters code WSBP IJ/WSBP.JK price of IDR645/share (+57% upside potential), based on an 11.7x PER on Target price (IDR/share) 645 Upside/downside (%) 57% its 2018F EPS. Our PER multiple is derived based on a 10% discount to the Current price (IDR/share) 412 average PER of global construction companies. 52W range (IDR/share) 336-600 Share outstanding (mn shares) 26,361 Guiding for growth: Management believes that the company is able to Market capitalization (IDRbn) 10,861 EV, current (IDRbn) 13,781 deliver 10% new contract growth this year, mainly supported by Waskita’s 3M avg daily turnover (IDRbn) 48 internal projects. However, WSBP decided to lower its 2017F new contract Fiscal Year Ending Dec. 31 16A 17F 18F 19F target to IDR10.5tn (from IDR12.3tn) due to a signing delay in two major Bahana EPS (IDR) 24 45 55 66 toll road projects (IDR0.8-1.0tn Penajam-Balikpapan toll road and IDR2.5tn Consensus EPS (IDR) 34 41 50 55 Revenue (IDRbn) 4,717 7,135 9,433 11,485 Probolinggo-Banyuwangi). Up until early December 2018, WSBP is able to EBITDA (IDRbn) 2,675 3,832 4,981 6,064 book new contracts of IDR9.5tn, of which 70% come from its internal holding Net profit (IDRbn) 635 1,176 1,452 1,746 Ratios: company WSKT. For 2018F, WSBP expects to book revenue of IDR9.7tn PER (x) 17.1 9.2 7.5 6.2 (+23% y-y) and net profit of IDR1.5tn (+23% y-y), 3% higher than our PBV (x) 1.5 1.3 1.2 1.0 ROE (%) 8.6% 14.2% 15.5% 16.4% estimates. EV/EBITDA (x) 5.2 3.6 2.8 2.3 Dividend yield (%) 3.5% 2.9% 3.2% 4.0% Resolving the cash flow issue: Negative operating cash flow has been Debt to equity (%) 45.3% 60.7% 51.0% 52.4% Net debt to equity (%) -11.5% 10.0% 29.6% 37.2% one of WSBP’s major holdbacks due to its holding company’s intensive toll- road investments. The group is in need of huge financing needs for its toll- road investments; thus to make up for the deficit cash flow, WTR uses a turnkey-project scheme whereby the contractor and supplier get paid after the construction of the project has been completed. As of 9M17, there are three turnkey projects in WSBP’s order book, namely: (1) IDR3tn Bekasi- Cawang-Kampung Melayu toll road, (2) IDR4.3tn Krian-Legundi-Bunder- Manyar (KLBM) toll road, and (3) IDR2.6tn Cimanggis-Cibitung Toll Ways (CCTW). On a more positive note, the completion of several toll-road projects is coming near, thus WSBP can expect some cash inflow from the turnkey payments. Based on newsflow, the company has received IDR429bn payment from the Becakayu project. The rest of the payment for the Becakayu project is expected to be received in 1H18F, whereas the payment for the two turnkey toll-roads (KLBM and CCTW) is expected to be booked in 2019F. However, we have not yet taken this into our forecast as we believe the key to WTR turnkey payment is when there is clarity on the divestment scheme and proceeds of WTR toll road assets.
Key downside risks: (1) lower-than-expected margin, (2) failure in WSKT asset divestment plan and (3) more participation in turnkey projects.
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 52
9 January 2018
FINANCIAL SUMMARY
Profit and Loss Statement Cash Flow Statement YE Dec. 31 (IDRbn) YE Dec. 31 (IDRbn)
2015 2016 2017F 2018F 2019F 2020F 2015 2016 2017F 2018F 2019F 2020F Precast 2,172 3,011 3,211 4,245 5,168 6,035 Net profit 635 1,176 1,452 1,746 2,025 Readymix 472 1,706 2,141 2,830 3,446 4,023 Depreciation 117 285 377 459 536 Construction - - 1,784 2,358 2,871 3,353 Changes in working capital (3,582) (1,307) (2,526) (1,870) (1,755) Others ------Cash flow from operations (2,830) 155 (697) 335 807 Net sales 2,644 4,717 7,135 9,433 11,485 13,410 Investment in joint ventures (18) 3 - - - Gross profit 2,225 3,667 5,273 7,056 8,591 10,031 Investment in properties - - - - - Share of profit of JO - 17 - - - - Fixed assets (1,063) (1,563) (943) (1,149) (1,341) Gross profit including JO 419 1,067 1,862 2,377 2,894 3,379 Others (20) (12) - - - Operating expenses (56) (97) (171) (226) (276) (322) Cash flow from investing (1,100) (1,571) (943) (1,149) (1,341) Operating income 363 970 1,691 2,151 2,619 3,058 Short & LT debt 2,595 1,660 (243) 821 770 Interest income 2 58 209 100 81 69 Capital stock 5,819 - - - - Financing expenses (20) (45) (350) (333) (390) (444) Retained earnings (379) (317) (353) (436) (524) Other income/ (expenses) (1) (15) 18 18 18 18 Others 3 56 54 48 45 Pretax profit 346 967 1,568 1,936 2,328 2,701 Cash flow from financing 8,038 1,399 (543) 433 291
Income taxes (11) (333) (392) (484) (582) (675) Net cash flow 4,108 (17) (2,182) (380) (243) Minority interest ------Beginning balance 98 4,206 4,189 2,006 1,626 Net profit 334 635 1,176 1,452 1,746 2,025 Ending balance 4,206 4,189 2,006 1,626 1,383
Balance sheet Ratio analysis YE Dec. 31 (IDRbn) IDR, %, x
2015 2016 2017F 2018F 2019F 2020F 2015 2016 2017F 2018F 2019F 2020F Cash and cash equivalent 98 4,206 4,189 2,006 1,626 1,383 Per share Account receivables 512 3,046 6,587 9,253 11,267 13,155 EPS (IDR) 13 24 45 55 66 77 Retention receivables ------BVPS (IDR) 50 281 314 355 405 462 Gross amount due from customers ------DPS (IDR) - 14 12 13 17 20 Inventories 55 232 211 235 286 334 DPR (%) - 114% 50% 30% 30% 30% Others 339 649 1,277 1,640 1,986 2,313 Current assets 1,004 8,133 12,264 13,134 15,165 17,185 Growth rates/ margins Investment in JV & associates - 18 14 14 14 14 Revenue growth (%) 0% 78% 51% 32% 22% 17% Investment in properties ------Earnings growth (%) 0% 150% 77% 28% 22% 17% Fixed assets 987 1,933 3,210 3,776 4,465 5,270 EBIT margin (%) 14% 21% 24% 23% 23% 23% Others 2,341 3,651 1,859 2,591 3,143 3,661 EBITDA margin (%) 0% 23% 28% 27% 27% 27% Total assets 4,332 13,734 17,348 19,516 22,788 26,130 Dupont analysis ST debt 302 1,907 5,016 3,773 4,594 5,364 Net margin (%) 13% 13% 16% 15% 15% 15% Account payables 730 1,542 3,296 4,410 5,369 6,269 Asset turnover (x) 0.6 0.3 0.4 0.5 0.5 0.5 Others 1,400 1,317 602 746 880 1,005 Leverage ratio (x) 3.3 1.9 2.1 2.1 2.1 2.1 Current liabilities 2,432 4,766 8,914 8,929 10,843 12,639 ROE (%) 25% 9% 14% 16% 16% 17% LT debt 459 1,449 - 1,000 1,000 1,000 Others 110 114 169 223 271 316 Solvency and liquidity Total liabilities 3,002 6,329 9,083 10,152 12,114 13,954 Net debt/ equity (%) 50% -11% 10% 30% 37% 41% Minority interest ------Interest coverage (x) 18.6 21.5 4.8 6.5 6.7 6.9 Shareholders' equity 1,331 7,406 8,264 9,364 10,674 12,175 Current ratio (x) 0.4 1.7 1.4 1.5 1.4 1.4
Other key metrics IDRbn, days, %
2015 2016 2017F 2018F 2019F 2020F New contract (IDRbn) 2,665 12,227 13,450 14,795 16,274 17,902 Carry over (IDRbn) 3,216 2,824 10,334 16,648 22,010 26,799 Total orderbook (IDRbn) 5,881 15,051 23,784 31,443 38,284 44,701 Non-joint operations 5,881 15,051 23,784 31,443 38,284 44,701 Joint operations ------% y-y total orderbook - 156% 58% 32% 22% 17% % y-y new contract - 359% 10% 10% 10% 10% Burn rate (%) 45% 31% 30% 30% 30% 30%
Gross margin Precast 16% 22% 30% 28% 28% 28% Readymix 16% 22% 22% 22% 22% 22% Construction - - 24% 24% 24% 24% Others ------Aggregate 16% 22% 26% 25% 25% 25% GPM after JO 16% 23% 26% 25% 25% 25%
Working capital days Receivables days 391 515 429 456 456 456 Payables days 294 242 228 228 228 228 Inventory days 9 23 15 12 12 12 Cash cycle 106 296 216 240 240 240 Source: Company, Bahana estimates
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 53
9 January 2018
Exhibit 126. Orderbook breakdown Exhibit 127. Orderbook burn rate 50,000 50 50% 45,000 40,000 40 38% 40%
35,000 17,902 30 30% 30,000 16,274
25,000 IDRtn 14,795
IDRbn 20 20%
20,000
26,799 13,410 13,410
15,000 13,450 11,485
22,010 10 10% 9,433
10,000 7,135
16,648
2,665 2,665
4,717 12,227
5,000 2,644
10,334 - 0%
- 3,216 2,824
2015 2016
2018F 2017F 2019F 2020F
2016 2015
2018F 2019F 2020F 2017F Revenue Orderbook New contract Revenue Carry-over contract Burn rate (RHS) Avg burn rate, 2015/16 (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 128. Revenue vs. y-y revenue growth Exhibit 129. Revenue breakdown 16,000 90% 100% 80% 90%
14,000 18%
25% 25% 25% 25%
80% 36% 12,000 70% 60% 70% 10,000
50% 60%
30% 30% 30% 8,000 30% 50% IDRbn 40% 6,000 40% 30% 82% 4,000
20% 30% 64%
45% 45% 45% 2,000 10% 20% 45% - 0% 10%
0%
2016 2015
2018F 2019F 2020F 2017F 2015 2016 2017F 2018F 2019F 2020F Revenue Revenue growth (RHS) Precast Readymix Construction Others Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 130. Gross profit vs. gross margin Exhibit 131. EBIT vs. EBIT margin 4,000 30% 3,500 25%
3,500 25% 3,000 20% 3,000 2,500 20% 2,500 2,000 15%
2,000 15% IDRbn IDRbn 1,500 10% 1,500 10% 1,000 1,000 5% 5% 500 500
- 0% - 0%
2016 2015
2015 2016
2017F 2018F 2019F 2020F
2017F 2018F 2019F 2020F Gross profit Gross margin (RHS) EBIT EBIT margin (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 54
9 January 2018
Exhibit 132. Net profit vs. net margin Exhibit 133. Profitability analysis 2,500 18% 30% 16% 25% 2,000 14% 20% 12% 1,500 10% 15%
IDRbn 8% 1,000 10% 6% 5% 500 4% 2% 0%
- 0%
2015 2016
2017F 2020F 2018F 2019F
2016 2015
2018F 2019F 2020F 2017F Gross margin EBIT margin Net profit Net margin (RHS) EBITDA margin Net margin Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 134. Return on asset vs. return on equity Exhibit 135. ROA vs. asset turnover 30% 9% 9% 0.7 8% 8% 25% 0.6 7% 7% 0.5 20% 6% 6% 5% 5% 0.4
15% x 4% 4% 0.3 10% 3% 3% 0.2 2% 2% 5% 0.1 1% 1%
0% 0% 0% -
2015 2016
2015 2016
2017F 2018F 2019F 2020F
2019F 2017F 2018F 2020F ROE ROA (RHS) ROA Asset tunover (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 136. Dupont analysis Exhibit 137. Liquidity analysis 3.5 30% 1.8 0.30 1.6 3.0 25% 0.20 1.4 2.5 20% 0.10 1.2 2.0
15% 1.0 0.00
x x 1.5 x 0.8 -0.10 10% 1.0 0.6 -0.20 0.5 5% 0.4 -0.30 0.0 0% 0.2
- -0.40
2015 2016
2017F 2018F 2019F 2020F
2015 2016
2018F 2019F 2020F Asset turnover Equity multiplier 2017F Net margin (RHS) ROE (RHS) Current ratio Quick ratio Net working capital ratio (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 55
9 January 2018
Exhibit 138. Receivable days vs receivable-to-revenue Exhibit 139. Account receivable as % of revenue 700 1.6 155%
600 1.4 140% 1.2 500 1.0 125% 400
0.8 x
IDRbn 300 110% 0.6 200 0.4 95% 100 0.2
- - 80%
2015 2016
2015 2016
2017F 2018F 2019F 2020F
2017F 2019F 2018F 2020F Receivable days Receivable-to-revenue (RHS) Account receivable as % of revenue Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 140. Cash conversion cycle Exhibit 141. Cash flow analysis 600 350 10,000
8,000 500 300 250 6,000 400 200 4,000
300 days days 2,000
150 IDRbn 200 - 100 (2,000) 100 50 (4,000) - -
(6,000)
2015 2016
2017F 2018F 2019F 2020F
2016
2018F 2019F 2020F Receivable days Inventory days 2017F Payable days Cash conversion cycle (RHS) Operating cash flow Investing cash flow Financing cash flow Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 142. Operating cash flow breakdown Exhibit 143. Capital burden 4,500 10,000
3,000 8,000 1,500 6,000 - 4,000
IDRbn (1,500)
IDRbn 2,000 (3,000)
(4,500) -
(6,000) (2,000)
2016 (4,000)
2018F 2020F 2017F 2019F
Net profit Depreciation
2016
2020F 2018F 2019F Changes in WC: receivables Changes in WC: Inventories 2017F Investing cash flow Financing cash flow Changes in WC: payables Others Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 56
9 January 2018
Sensitivity analysis (2018F) Changes in non-JO new contract growth and burn rate to revenue 2017F
- Non-JO new contract growth (%) Non-JO new contract growth (%) -5% 0% 5% 10% 15% 20% 25% -5% 0% 5% 10% 15% 20% 25% 15% 4,414 4,515 4,616 4,716 4,817 4,918 5,019 15% -53.2% -52.1% -51.1% -50.0% -48.9% -47.9% -46.8% 20% 5,885 6,020 6,154 6,289 6,423 6,558 6,692 20% -37.6% -36.2% -34.8% -33.3% -31.9% -30.5% -29.1% 25% 7,356 7,525 7,693 7,861 8,029 8,197 8,365 25% -22.0% -20.2% -18.4% -16.7% -14.9% -13.1% -11.3% 30% 8,828 9,029 9,231 9,433 9,635 9,836 10,038 30% -6.4% -4.3% -2.1% 0.0% 2.1% 4.3% 6.4%
rate (%) (%) rate (%) rate 35% 10,299 10,534 10,770 11,005 11,240 11,476 11,711 35% 9.2% 11.7% 14.2% 16.7% 19.2% 21.7% 24.2% 40% 11,770 12,039 12,308 12,577 12,846 13,115 13,384 40% 24.8% 27.6% 30.5% 33.3% 36.2% 39.0% 41.9% Non-JO precast burn 45% 13,242 13,544 13,847 14,149 14,452 14,755 15,057 Non-JO precast burn 45% 40.4% 43.6% 46.8% 50.0% 53.2% 56.4% 59.6%
Changes in precast gross margin & construction revenue contribution to EPS 2017F
- Precast gross margin (%) Precast gross margin (%) 25% 26% 27% 28% 29% 30% 31% 25% 26% 27% 28% 29% 30% 31% 30% 50 51 52 53 53 54 55 30% -8.7% -7.3% -5.8% -4.4% -2.9% -1.5% 0.0% 35% 51 52 53 53 54 55 56 35% -8.0% -6.3% -4.6% -2.9% -1.2% 0.5% 2.2% 40% 51 52 53 54 55 56 57 40% -7.3% -5.3% -3.4% -1.5% 0.5% 2.4% 4.4% 45% 51 53 54 55 56 57 59 45% -6.5% -4.4% -2.2% 0.0% 2.2% 4.4% 6.5% 50% 52 53 55 56 57 59 60 50% -5.8% -3.4% -1.0% 1.5% 3.9% 6.3% 8.7%
contribution (%) contribution (%) Precast revenue Precast revenue 55% 52 54 55 57 58 60 61 Precast revenue 55% -5.1% -2.4% 0.2% 2.9% 5.6% 8.2% 10.9% 60% 53 54 56 57 59 61 62 60% -4.4% -1.5% 1.5% 4.4% 7.3% 10.2% 13.1%
Account and other receivables as % of revenue to total receivables 2017F
- Account receivable as % of revenue Account receivable as % of revenue 50% 75% 100% 125% 150% 175% 200% 50% 75% 100% 125% 150% 175% 200% 0% 4,735 7,094 9,452 11,810 14,168 16,527 18,885 0% -59.9% -39.9% -20.0% 0.0% 20.0% 39.9% 59.9% 2% 4,905 7,263 9,622 11,980 14,338 16,696 19,055 2% -58.5% -38.5% -18.5% 1.4% 21.4% 41.4% 61.3% 4% 5,075 7,433 9,791 12,150 14,508 16,866 19,224 4% -57.0% -37.1% -17.1% 2.9% 22.8% 42.8% 62.8% 6% 5,245 7,603 9,961 12,319 14,678 17,036 19,394 6% -55.6% -35.6% -15.7% 4.3% 24.3% 44.2% 64.2%
of revenue of revenue 7% 5,415 7,773 10,131 12,489 14,847 17,206 19,564 of revenue 7% -54.2% -34.2% -14.2% 5.8% 25.7% 45.7% 65.7% 9% 5,584 7,943 10,301 12,659 15,017 17,375 19,734 9% -52.7% -32.7% -12.8% 7.2% 27.2% 47.1% 67.1%
Other receivable as % % as Other receivable 11% 5,754 8,112 10,471 12,829 15,187 17,545 19,904 % as Other receivable 11% -51.3% -31.3% -11.3% 8.6% 28.6% 48.6% 68.5%
Account and other receivables as % of revenue to OCF 2017F
- Account receivable as % of revenue 50% 75% 100% 125% 150% 175% 200% 0% 6,559 4,141 1,722 (697) (3,115) (5,534) (7,953) 2% 6,385 3,967 1,548 (871) (3,289) (5,708) (8,127) 4% 6,211 3,793 1,374 (1,045) (3,464) (5,882) (8,301) 6% 6,037 3,618 1,200 (1,219) (3,638) (6,056) (8,475)
of revenue of revenue 7% 5,863 3,444 1,026 (1,393) (3,812) (6,231) (8,649) 9% 5,689 3,270 851 (1,567) (3,986) (6,405) (8,823) Other receivable as % % as Other receivable 11% 5,515 3,096 677 (1,741) (4,160) (6,579) (8,998) Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 57
9 January 2018
Valuation bands and movements Forward P/E band P/E movement 1,400 30 24X 1,200 25 +2STD 1,000 18X 20 800 +1STD
X 15 /share 12X 600 12.1 IDR 10 400 6X -1STD 5 200 -2STD
-
Feb-17 Apr-17 Aug-17 Dec-17 Oct-16 Nov-16 Dec-16 Jan-17 Mar-17 May-17 Jun-17 Jul-17 Sep-17 Oct-17 Nov-17
- Sep-16
Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Price 6X 12X 18X 24X P/E Average P/E
Forward P/B band P/B movement 1,000 2.4 900 2.5X 2.2 +2STD 800 700 2.0X 2.0 +1STD 600 1.8
500 1.5X X /share 1.6
IDR 400 1.5 1.0X 300 1.4 200 1.2 -1STD 100
1.0
Sep-16 Nov-16 Jan-17 Dec-16 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
- Oct-16
Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Price 1.0X 1.5X 2.0X 2.5X P/B Average P/B
Forward EV/EBITDA band EV/EBITDA movement 1,400 15.0
1,200 14X +2STD 12.0 1,000 11X +1STD 9.0 800
X 7.5 /share 8X 600 6.0 IDR -1STD 400 5X 3.0 200 -2STD
-
Oct-16 Nov-17 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Dec-17
- Sep-16
Jan-17 May-17 Nov-17 Sep-16 Oct-16 Nov-16 Dec-16 Feb-17 Mar-17 Apr-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Dec-17
Price 5X 8X 11X 14X EV/EBITDA Average EV/EBITDA
Forward EV/orderbook band P/B ROE 1,200 3.0 18% P/B ROE (RHS) 1.0X 1,000 .8X 800 2.0 12%
600 .6X
/share
X IDR 400 .4X 1.0 6% 200
-
Sep-16 Dec-16 Jun-17 Nov-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Oct-16 - 0%
Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Price .4X .6X .8X 1.0X
Source: Bloomberg, Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 58
9 January 2018
Wijaya Karya Beton
Diversified precast producer
Initiating coverage with a BUY rating and TP of IDR610: We initiate Exhibit 144. WTON key ratio and statistics our coverage on Wijaya Karya with a BUY rating and a 12-month target price Company information Bloomberg/ Reuters code WTON IJ/WTON.JK of IDR610/share (17% upside potential), based on an 11.7x PER on its Target price (IDR/share) 610 2018F EPS. Our PER multiple is derived based on a 10% discount to the Upside/downside (%) 17% Current price (IDR/share) 520 average PER of global construction companies. 52W range (IDR/share) 464-860 Share outstanding (mn shares) 8,715 On-track performance: WTON booked a 9M17 revenue of IDR3.4tn (+53% Market capitalization (IDRbn) 4,532 EV, current (IDRbn) 5,712 y-y), which accounts for 70% of our and 71% of the consensus estimate. On 3M avg daily turnover (IDRbn) 15 the bottom line, WTON reported IDR220bn net profit (+52% y-y), which accounts for 64% of our and 61% of the consensus estimate. On the contract Fiscal Year Ending Dec. 31 16A 17F 18F 19F Bahana EPS (IDR) 31 39 52 60 attainment, as of 11M17, WTON has booked total new contracts of IDR5tn, Consensus EPS (IDR) 31 41 50 61 and the management is targeting for IDR7tn for the full-year number. The Revenue (IDRbn) 3,482 4,892 6,639 7,372 EBITDA (IDRbn) 545 746 1,000 1,130 company aims to book a c.IDR1.5tn new contract from an eleveted toll road Net profit (IDRbn) 272 341 451 525 project in the eastern part of Indonesia. Moreover, WTON's management is Ratios: PER (x) 16.6 13.3 10.0 8.6 guiding for 2018 new contracts to grow 20% y-y this year, mainly supported PBV (x) 1.9 1.7 1.5 1.3 by contracts from mass transportation and toll-road projects in Jakarta. On ROE (%) 11.2% 12.7% 14.9% 15.4% EV/EBITDA (x) 10.5 7.7 5.7 5.1 the margin side, WTON booked lower 9M17 GPM of 12.7%, a 1.1% decline Dividend yield (%) 1.2% 1.8% 2.3% 3.0% from the 9M16 number, which we believe was caused by the recent full Debt to equity (%) 26.9% 53.9% 67.2% 63.0% Net debt to equity (%) 13.2% 47.3% 56.6% 54.4% operation of Subang plant.
Well-diversified client base and product line: Having borne the title of leading precast player in Indonesia, WTON has a proven track record in serving multitudes of clients and producing various types of precast products. Based on the 9M17 figure, WTON serves mainly state-owned enterprise (36%) and private local (36%) clients, while contracts from the WIKA group partook 26% of the pie. Even though the majority of WTON contracts is coming from infrastructure-related projects, WTON is also able to produce precast for other industries, namely in energy, industrial, property, and mining. Facing a growing order book, the company is planning to increase its production capacity, from the current capacity of 3.0mt/annum to 3.3mt/annum in 2018 by adding new production lines in the existing plants and also by improving the plant's production efficiency.
Key downside risks: (1) lower-than-expected margin, (2) slower-than- expected burn rate and (3) low contract winning rate.
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 59
9 January 2018
FINANCIAL SUMMARY
Profit and Loss Statement Cash Flow Statement YE Dec. 31 (IDRbn) YE Dec. 31 (IDRbn) 2014 2015 2016 2017F 2018F 2019F 2020F 2014 2015 2016 2017F 2018F 2019F 2020F Concrete 3,228 2,584 3,325 4,068 5,049 5,926 7,193 Net profit 329 174 272 341 451 525 632 Service 50 64 133 457 730 861 1,052 Depreciation 85 90 137 196 266 295 337 Quarry - 5 24 46 58 103 168 Changes in working capital (283) 95 (653) (940) (535) (241) (343) Head office ------Cash flow from operations 130 359 (244) (403) 181 579 626 HSR - - - 321 802 481 - Others ------Investment in joint ventures ------Net sales 3,277 2,653 3,482 4,892 6,639 7,372 8,413 Investment in properties 0 0 0 - - - - Fixed assets (744) (417) (359) (489) (531) (590) (673) Gross profit 487 329 504 684 916 1,036 1,209 Others 5 0 0 - - - - Operating expenses (78) (90) (96) (134) (181) (201) (230) Cash flow from investing (739) (416) (358) (489) (531) (590) (673) Operating income 409 238 408 550 734 835 979 Short & LT debt 25 (35) 137 813 600 117 167 Interest income 54 37 16 5 10 9 8 Capital stock 1,178 ------Financing expenses (48) (63) (57) (97) (136) (143) (154) Retained earnings (19) (99) (52) (82) (102) (135) (158) Other income/ (expenses) (3) (13) (28) (8) (9) (10) (11) Others 50 (24) 36 - - - - Pretax profit 412 200 340 451 599 690 821 Cash flow from financing 1,234 (158) 121 731 497 (18) 9
Income taxes (89) (28) (59) (98) (133) (147) (168) Net cash flow 625 (215) (481) (161) 148 (28) (38) Minority interest (6) (2) 9 11 15 18 21 Beginning balance 413 1,038 824 342 181 329 300 Net profit 329 174 272 341 451 525 632 Ending balance 1,038 824 342 181 329 300 262
Balance sheet Ratio analysis YE Dec. 31 (IDRbn) IDR, %, x
2014 2015 2016 2017F 2018F 2019F 2020F 2014 2015 2016 2017F 2018F 2019F 2020F Cash and cash equivalent 1,038 824 342 181 329 300 262 Per share Account receivables 476 570 653 1,138 1,544 1,714 1,956 EPS (IDR) 38 20 31 39 52 60 72 Retention receivables ------BVPS (IDR) 246 253 278 308 348 392 447 Gross amount due from customers ------DPS (IDR) 2 11 6 9 12 16 18 Inventories 458 622 694 1,052 1,431 1,584 1,801 DPR (%) 8% 30% 30% 30% 30% 30% 30% Others 155 439 750 1,746 2,317 2,568 2,925 Current assets 2,127 2,455 2,440 4,117 5,621 6,167 6,944 Growth rates/ margins Investment in joint venture ------Revenue growth (%) 24% -19% 31% 41% 36% 11% 14% Investment in properties 3 3 3 3 3 3 3 Earnings growth (%) 35% -47% 57% 25% 32% 16% 20% Fixed assets 1,671 1,998 2,219 2,513 2,778 3,073 3,410 EBIT margin (%) 12% 9% 12% 11% 11% 11% 12% Others 1 0 - - - - - EBITDA margin (%) 15% 12% 16% 15% 15% 15% 16% Total assets 3,802 4,456 4,662 6,633 8,402 9,243 10,357 Dupont analysis ST debt 566 213 470 963 1,062 1,179 1,346 Net margin (%) 10% 7% 8% 7% 7% 7% 8% Account payables 420 557 664 1,052 1,431 1,584 1,801 Asset turnover (x) 0.9 0.6 0.7 0.7 0.8 0.8 0.8 Others 523 1,023 730 1,240 1,682 1,863 2,119 Leverage ratio (x) 1.8 2.0 1.9 2.5 2.8 2.7 2.7 Current liabilities 1,510 1,793 1,864 3,255 4,176 4,626 5,266 ROE (%) 15% 8% 11% 13% 15% 15% 16% LT debt 1 320 200 520 1,020 1,020 1,020 Others 89 79 108 108 108 108 108 Solvency and liquidity Total liabilities 1,600 2,193 2,172 3,883 5,304 5,754 6,394 Net debt/ equity (%) -21% -13% 13% 47% 57% 54% 53% Minority interest 59 58 69 69 69 69 69 Interest coverage (x) 8.5 3.8 7.2 5.7 5.4 5.8 6.3 Shareholders' equity 2,143 2,205 2,422 2,682 3,030 3,420 3,894 Current ratio (x) 1.4 1.4 1.3 1.3 1.3 1.3 1.3
Other key metrics IDRbn, days, %
2014 2015 2016 2017F 2018F 2019F 2020F New contract (IDRbn) 2,606 3,481 5,997 8,500 7,586 8,345 9,179 Carry over (IDRbn) 1,630 794 1,521 3,987 7,596 8,542 9,516 Total orderbook (IDRbn) 4,237 4,275 7,518 12,488 15,182 16,887 18,695 Non-joint operations (incl. HSR) 4,237 4,275 7,518 12,488 15,182 16,887 18,695 Joint operations ------% y-y total orderbook -2% 1% 76% 66% 22% 11% 11% % y-y new contract -3% 34% 72% 42% -11% 10% 10% Burn rate (%) 77% 62% 46% 39% 44% 44% 45%
Gross margin Concrete - - - 14% 14% 14% 14% Service - - - 16% 16% 16% 16% Quarry - - - 20% 20% 20% 20% Head office ------HSR - - - 10% 10% 10% - Others ------
Working capital days Receivables days 53 78 69 85 85 85 85 Payables days 55 88 81 91 91 91 91 Inventory days 60 98 85 91 91 91 91 Cash cycle 58 89 72 85 85 85 85 Source: Company, Bahana estimates
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 60
9 January 2018
Exhibit 145. Orderbook breakdown Exhibit 146. Orderbook burn rate 20,000 21 100%
17,500 18
9,179 9,179 80% 15,000 8,345 8,345 15
12,500 7,586 12 60%
51.0% 8,500 8,500
10,000 IDRtn 8,413 8,413 9
IDRbn 40%
7,372 7,372 9,516 9,516 7,500 6,639
8,542 8,542 6
7,596 7,596 4,892 4,892
5,000 5,997 20%
3,482 3,482
3,277 3,277 2,653 2,653 2,644 2,644 3
2,500
2,678 2,678
3,481 3,481 2,606 2,606 3,987 3,987 - 0%
- 1,626 1,630 794 1,521
2013 2014 2015 2016
2017F 2018F 2019F 2020F
2016 2013 2014 2015
2018F 2019F 2020F 2017F Revenue Orderbook New contract Revenue Carry-over contract Burn rate (RHS) Avg burn rate, 2013/16 (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 147. Revenue vs. y-y revenue growth Exhibit 148. Revenue breakdown
100%
1%
1%
1% 1%
2% 2%
9,000 100% 2%
8,413
2% 4%
8,000 7,372 95% 6,639
7,000 70% 10%
13%
13% 13%
6,000 4,892 90% 40% 5,000
85%
99%
98% 97%
IDRbn 4,000
3,482 96%
3,277 10% 2,653
3,000 2,644 80%
89%
87% 86% 2,000 -20% 86% 75% 1,000
- -50% 70%
2014 2016 2013 2015
2013 2014 2015 2016
2018F 2017F 2019F 2020F
2017F 2018F 2019F 2020F Revenue Revenue Growth (RHS) Concrete Service Quarry Head office Others Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 149. Gross profit vs. gross margin Exhibit 150. EBIT vs. EBIT margin
1,400 16% 1,200 15% 1,209
979 979 14% 1,200 15% 1,000
1,036 13% 835 835
1,000 916
14% 800 734 12% 800 684 684 11%
13% 600 550 IDRbn IDRbn 10%
600 504
487 487
409 409
408 408 336 336 388 388 12% 400 9% 400 329 238 238 8% 200 11% 200 7%
- 10% - 6%
2013 2014 2015 2016 2013 2014 2015 2016
2017F 2020F 2018F 2019F 2020F 2017F 2018F 2019F Gross profit Gross margin (RHS) EBIT EBIT margin (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 61
9 January 2018
Exhibit 151. Net profit vs. net margin Exhibit 152. Profitability analysis
700 14% 20% 632 632 13% 600
525 525 12% 16%
500 451 11% 12% 10%
400 341 341
329 329 9% 272 272 IDRbn 300 8% 243 243 8%
174 174 7% 200 4% 6% 100 5% 0%
- 4%
2013 2014 2015 2016
2019F 2017F 2018F 2020F
2016 2013 2014 2015
2018F 2019F 2020F 2017F Gross margin EBIT margin Net profit Net margin (RHS) EBITDA margin Net margin Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 153. Return on asset vs. return on equity Exhibit 154. ROA vs. asset turnover 60% 12% 12.0% 1.4
50% 10% 10.0% 1.2
1.0 40% 8% 8.0% 0.8
30% 6% 6.0% x 0.6 20% 4% 4.0% 0.4 10% 2% 2.0% 0.2
0% 0% 0.0% -
2016 2013 2014 2015
2014 2013 2015 2016
2017F 2018F 2019F 2020F
2017F 2018F 2019F 2020F ROE ROA (RHS) ROA Asset tunover (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 155. Dupont analysis Exhibit 156. Liquidity analysis 5.0 40% 2.0 0.18 35% 4.0 0.15 30% 1.6 3.0 25% 0.12
20%
x x 1.2 0.09 x 2.0 15% 10% 0.06 1.0 0.8 5% 0.03 0.0 0%
0.4 0.00
2016 2013 2014 2015
2017F 2018F 2019F 2020F
2013 2014 2015 2016
2017F 2019F 2020F Asset turnover Equity multiplier 2018F Net margin (RHS) ROE (RHS) Current Ratio Quick ratio Net working capital ratio (RHS) Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 62
9 January 2018
Exhibit 157. Receivable days vs receivable-to-revenue Exhibit 158. Account receivable as % of revenue 140 0.3 30%
120 0.2 25% 100
0.2
80 20% x
IDRbn 60 0.1 15%
40 0.1 10% 20
- - 5%
2015 2013 2014 2016
2013 2014 2015 2016
2017F 2018F 2019F 2020F
2017F 2018F 2019F 2020F Receivable days Receivable-to-revenue (RHS) Account receivable as % of revenue Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 159. Cash conversion cycle Exhibit 160. Cash flow analysis 160 160 1,500
140 140 1,000 120 120
100 100 500
80 80 days days -
60 60 IDRbn (500) 40 40
20 20 (1,000) - -
(1,500)
2014 2013 2015 2016
2018F 2017F 2019F 2020F
2014 2015 2016
2017F 2019F 2020F Receivable days Inventory days 2018F Payable days Cash conversion cycle (RHS) Operating cash flow Investing cash flow Financing cash flow Source: Company, Bahana forecasts Source: Company, Bahana forecasts
Exhibit 161. Operating cash flow breakdown Exhibit 162. Capital burden 2,000 1,500
1,500 1,000 1,000
500 500
IDRbn - IDRbn (500) -
(1,000) (500)
(1,500)
2014 2016
2015 (1,000)
2017F 2018F 2019F 2020F
EBIT Depreciation
2014 2015 2016
2018F 2019F 2020F Changes in WC, receivables Changes in WC, inventories 2017F Investing cash flow Financing cash flow Changes in WC, payables Others Source: Company, Bahana forecasts Source: Company, Bahana forecasts
PT. Bahana Sekuritas – Equity Research – Indonesia Construction 63
9 January 2018
Sensitivity analysis (2018F)
Changes in non-JO new contract growth and non-JO burn rate to revenue 2017F
- Non-JO new contract growth (%) Non-JO new contract growth (%) -5% 0% 5% 10% 15% 20% 25% -5% 0% 5% 10% 15% 20% 25% 27% 4,275 4,368 4,462 4,555 4,648 4,741 4,834 27% -35.6% -34.2% -32.8% -31.4% -30.0% -28.6% -27.2% 32% 4,919 5,029 5,139 5,250 5,360 5,470 5,581 32% -25.9% -24.3% -22.6% -20.9% -19.3% -17.6% -15.9% 37% 5,562 5,689 5,817 5,944 6,072 6,200 6,327 37% -16.2% -14.3% -12.4% -10.5% -8.5% -6.6% -4.7% 42% 6,205 6,350 6,495 6,639 6,784 6,929 7,074 42% -6.5% -4.4% -2.2% 0.0% 2.2% 4.4% 6.5%
rate (%) (%) rate (%) rate 47% 6,848 7,010 7,172 7,334 7,496 7,659 7,821 47% 3.1% 5.6% 8.0% 10.5% 12.9% 15.3% 17.8% 52% 7,491 7,671 7,850 8,029 8,209 8,388 8,567 52% 12.8% 15.5% 18.2% 20.9% 23.6% 26.3% 29.0%
Non-JO concrete burn 57% 8,135 8,331 8,528 8,724 8,921 9,117 9,314 Non-JO concrete burn 57% 22.5% 25.5% 28.4% 31.4% 34.4% 37.3% 40.3%
Changes in precast gross margin & revenue contribution to EPS 2017F
- Concrete gross margin (%) Concrete gross margin (%) 11% 12% 13% 14% 15% 16% 17% 11% 12% 13% 14% 15% 16% 17% 78% 38 43 48 53 58 63 68 78% -27.2% -17.3% -7.5% 2.3% 12.1% 21.9% 31.7% 81% 37 42 47 53 58 63 68 81% -29.1% -18.9% -8.7% 1.5% 11.7% 21.9% 32.1% 84% 36 41 47 52 58 63 69 84% -31.0% -20.4% -9.8% 0.8% 11.3% 21.9% 32.5% 87% 35 40 46 52 57 63 69 87% -32.9% -21.9% -11.0% 0.0% 11.0% 21.9% 32.9% 90% 34 40 45 51 57 63 69 90% -34.8% -23.4% -12.1% -0.8% 10.6% 21.9% 33.2%
contribution (%) contribution (%)
Concrete revenue Concrete revenue 93% 33 39 45 51 57 63 69 Concrete revenue 93% -36.7% -24.9% -13.2% -1.5% 10.2% 21.9% 33.6% 96% 32 38 44 51 57 63 69 96% -38.6% -26.5% -14.4% -2.3% 9.8% 21.9% 34.0%
Changes in account and other receivables as % of revenue to total receivables 2017F
- Account receivable as % of revenue Account receivable as % of revenue 14% 17% 20% 23% 26% 29% 32% 14% 17% 20% 23% 26% 29% 32% 0% 965 1,164 1,363 1,562 1,762 1,961 2,160 0% -38.2% -25.5% -12.7% 0.0% 12.7% 25.5% 38.2% 2% 1,079 1,278 1,478 1,677 1,876 2,075 2,274 2% -30.9% -18.2% -5.4% 7.3% 20.1% 32.8% 45.6% 4% 1,212 1,411 1,610 1,810 2,009 2,208 2,407 4% -22.4% -9.7% 3.1% 15.8% 28.6% 41.3% 54.1% 6% 1,345 1,544 1,743 1,942 2,142 2,341 2,540 6% -13.9% -1.2% 11.6% 24.3% 37.1% 49.8% 62.6%
of revenue of revenue 8% 1,478 1,677 1,876 2,075 2,274 2,474 2,673 of revenue 8% -5.4% 7.3% 20.1% 32.8% 45.6% 58.3% 71.1% 10% 1,610 1,810 2,009 2,208 2,407 2,606 2,806 10% 3.1% 15.8% 28.6% 41.3% 54.1% 66.8% 79.6%
Other receivable as % % as Other receivable 12% 1,743 1,942 2,142 2,341 2,540 2,739 2,938 % as Other receivable 12% 11.6% 24.3% 37.1% 49.8% 62.6% 75.3% 88.1%
Changes in account and other receivables as % of revenue to OCF 2017F
- Account receivable as % of revenue 14% 17% 20% 23% 26% 29% 32% 0% 789 587 384 181 (21) (224) (426) 2% 673 470 268 65 (138) (340) (543) 4% 538 335 133 (70) (273) (475) (678) 6% 403 200 (3) (205) (408) (610) (813)
of revenue of revenue 8% 268 65 (138) (340) (543) (746) (948) 10% 133 (70) (273) (475) (678) (881) (1,083) Other receivable as % % as Other receivable 12% (3) (205) (408) (610) (813) (1,016) (1,218) Source: Company, Bahana forecasts
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Valuation bands and movements Forward P/E band P/E movement 3,700 70.0 66X 3,200 60.0 +2STD 2,700 50.0 47X +1STD
2,200 40.0
X /share 1,700 30.0 29.3X
IDR 28X 1,200 20.0 -1STD 10.0 700 10X
- -2STD
Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
200 Apr-14
Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
Price 10X 28X 47X 66X P/E Average P/E
Forward P/B band P/B movement 2,500 6.0
+2STD 2,000 5.5X 5.0 +1STD 1,500 4.0
4.0X X /share 3.3X
1,000 3.0X 3.0 IDR
-1STD 500 1.5X 2.0 -2STD
- 1.0
Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
Price 1.5X 3.0X 4.0X 5.5X P/B Average P/B
Forward EV/EBITDA band EV/EBITDA movement 4,000 36.0 34X 3,500 30.0 +2STD 3,000 24.0 2,500 25X +1STD
2,000 X 18.0 /share 16.0X
IDR 1,500 15X 12.0 1,000 -1STD 6.0 500 6X -2STD
-
Apr-16 Oct-14 Apr-15 Oct-15 Oct-16 Apr-17 Oct-17
- Apr-14
Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
Price 6X 15X 25X 34X EV/EBITDA Average EV/EBITDA
Forward EV/orderbook band P/B ROE 4,500 6.0 18% 2.5X P/B ROE (RHS) 4,000 5.0 15% 3,500
3,000 1.8X 4.0 12%
2,500 /share 2,000 X 3.0 9%
IDR 1.1X 1,500 2.0 6% 1,000 500 .4X 1.0 3%
-
Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
Apr-14 - 0%
Apr-17 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Oct-17
Price .4X 1.1X 1.8X 2.5X
Source: Bloomberg, Company, Bahana forecasts
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APPENDIX 1
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Infrastructure: Cornerstone for future growth
Infrastructure is key to economic production, trade and improving everyday Infrastructure is key to economic production, life. Roads, ports, airports, rail and telecom networks are the conduits of trade and improving everyday life, where trade and mobility. Electricity fuels production, and clean water underpins investment that modernizes and maintains public health. Investment that modernizes and maintains these systems can these systems can propel economic growth propel economic growth. Infrastructure is characterized by a unique set of characteristics – its services are typically delivered through complex and costly network systems; and although initial investments in infrastructure are large, the marginal cost of servicing additional customers is usually low and decreasing. Therefore, infrastructure has been often characterized as a natural monopoly, giving rise to the general dominance of government or public agencies in providing its services. Moreover, governments dominate these sectors as they are considered essential to the people, influence social equity and stability; and/or generate externalities.
Box 1. Microeconomic studies of impacts of transport infrastructure
Based on our research, several past studies stand out in using detailed micro data to investigate how diverse types of transportation infrastructure could impact economic development in a country: . A large-scale highway construction and improvement project, called the Golden Quadrilateral (GQ) project, was launched in India in 2001. Over the decade post the completion, districts located within 10km from the GQ network grew by 50% while districts 10-50km from the network did not. . Khandker, Bakht, Koolwal (2009) find that rural roads benefited the poor more than the non-poor. In addition, they also find that rural road investments in Bangladesh led to higher agricultural production, higher wages, lower input and transportation costs, higher output prices and higher schooling of youth. . Li and Chen (2013) studied a railway project that doubled the shipping capacity of a 1,200-mile-long railway in Northwest of China, which was congested in one-direction before the expansion. They find that after the project, the price gap of goods shipped in the congested direction dropped by 30% and shipping volumes increased by 40%, whereas goods moved in the non-congested direction were unaffected. The estimated social return of the investment reached 10% annually in the most conservative case. . A study of the rapidly expanded road network in China echoes the effect that road infrastructure has on a firm’s inventory. Based on a Li and Li study (2013), they estimate that USD1.00 of road spending saves about USD0.02 of inventory costs, a non-trivial saving. A study by Yoshino and Pontines found 3 Arterial Road (STAR) in Batangas, Philippines, increases tax and nontax revenues for the municipalities it passes through. . Yoshino and Abidhadjaev (2015) provide some evidence that a newly built railway in south Uzbekistan may have caused 0.4-2.0% GDP growth in the regions affected. Finally, Chen and Whalley (2012) show that the opening of the new rail transit system in Taipei reduced air pollution from carbon monoxide, a key tailpipe pollutant, by 5-15%. The results highlight the importance of urban public railway transit infrastructure.
According to the McKinsey Global Institute (MGI), infrastructure investment According to MGI, infrastructure investment typically has a socioeconomic rate of return of around 20%. In other words, typically has a socioeconomic rate of return of one dollar of infrastructure investment could raise GDP by 20cents in the around 20% long run by boosting productivity. Some infrastructure investments, if well- chosen and well-executed, could have benefit-cost ratios of up to 20:1.
Moreover, MGI estimates that the world will have to invest up to USD3.3tn annually (in constant 2015 prices) from 2016–2030 to simply keep pace with economic growth forecasts. These needs are highly sensitive to growth rates since economic activity increases demand on infrastructure assets as well as generating the funding required to build them. While it is possible for governments to lower infrastructure investment and maintain economic growth for a short period of time, this pattern could create a drag on growth in the future. MGI’s estimate of USD3.3tn in required annual investment MGI’s estimate of USD3.3tn in required annual adds up to a cumulative need for USD49tn over 2016 to 2030. It should be investment adds up to a cumulative need for noted that this amount is based on an average global GDP growth rate of USD49tn over 2016 to 2030. It should be noted 3.3%. But if global growth averages 1ppts slower, total investment need that this amount is based on an average global would fall by about USD13tn. GDP growth rate of 3.3%
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Exhibit 163. The world needs to invest USD3.3tn* in Exhibit 164. The size of the infrastructure investment economic infrastructure annually through 2030 to gap varies widely by geography. Global gap between keep pace with projected growth spending and needs is estimated at 0.4% of global GDP 3.5 4.0 Gap between spending and Actual infra spending, 2008-13 estimated infra needs, 2016-30
3.0 3.5 China 8.8 (3.3) Qatar 7.6 (0.3) 3.0 2.5 India 5.2 0.5 South Africa 4.7 1.2 2.5 Australia 4.7 (1.2) 2.0 Saudi Arabia 4.6 0.9
2.0 Russia 4.5 (0.1) tn/year
1.5 Japan 4.0 (1.5) % of of % GDP
USD 1.5 Turkey 3.6 0.6 Canada 3.5 (0.0)
1.0 GDP of % 1.0 Indonesia 3.1 1.3 Mexico 2.7 1.1 0.5 0.5 Brazil 2.5 0.7 Italy 2.4 (0.1) - - United States 2.4 0.7 United Kingdom 2.2 0.4
Rail France 2.1 (0.1)
Total
Ports
Roads Water
Power Germany 2.0 0.4
Airports Telecom Global gap = 0.4%, or USD5.2tn Source: McKinsey Global Institute, IHS Global Insight, International Transport Source: McKinsey Global Institute, IHS Global Insight, International Transport Forum, Global Water Intelligence, Bahana. *in constant 2015 dollars Forum, Global Water Intelligence, Bahana
Furthermore, MGI estimates that if current investment rates remain MGI estimates that if current investment rates unchanged, the world will fall far short of these projected needs. Baseline remain unchanged, the world will fall far short needs already exceed investment by around 0.4% of global GDP, or of these projected needs USD350bn annually. In cumulative terms, the gap totals USD5.2tn globally across the entire period from 2016 to 2030. Many of the world’s largest economies, emerging and developed alike, are on trajectories that will produce notable shortfalls.
Infrastructure quality strongly correlates to income level
Infrastructure quality strongly corresponds to income level, and many countries typically characterized as having particularly weak or strong infrastructure seem to be, in fact, simply very poor or very rich. It is helpful to look instead at which economies outperform relative to their income level.
Exhibit 165. Infrastructure quality vs. GDP per capita 7.0 Better-than-expected infrastructure Switzerland 6.5 Finland United 6.0 States
5.5 United Kingdom
(higher is is (higherbetter) 5.0 Norway Rwanda India China 4.5 Italy
Sri Lanka infraquality - 4.0 Russia Indonesia 3.5
3.0 Brazil
2.5 Global competitive Global index Worse-than-expected infrastructure 2.0 - 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 GDP per capita (constant international USD) Source: World Bank, Bahana
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Gauging each country’s infrastructure quality against GDP per capita also indicates its progress. Switzerland, for instance, has the highest-quality infrastructure in the world; it stands out even among other very high-income peer economies. In contrast, for example, Norway “underperforms”. The country has very good infrastructure, but its road network in particular does not secure the quality rating that would be expected for a country at such a high income level (an issue that might relate to the fact that it is thinly populated and has difficult topography). Historic underinvestment and chronic inefficiency in infrastructure builds have left Brazil significantly underperforming relative to its income level. By contrast, certain very low- income economies such as Rwanda have surprisingly solid infrastructure for their stage of economic development, and they might provide templates for other countries to follow.
Countries perform differently in terms of investment gaps as well as quality gaps
Looking at the picture dynamically over time, the overall curve tends to shift Looking at the picture dynamically over time, upward as more of the world builds out infrastructure systems, even though the overall curve tends to shift upward as more individual countries do not necessarily move along the same line. But of the world builds out infrastructure systems, infrastructure quality rankings actually declined since the crisis for some even though individual countries do not countries, such as: Germany and the United States. Others, like Spain, necessarily move along the same line defied the odds and posted strong improvement despite declining income levels after the global financial crisis.
In many economies, underinvestment is quite visible in the shortcomings of basic systems. Using data from the World Bank and McKinsey Global Institute, we found that some countries manage to sustain high quality standards despite relatively low investment – and still others invest heavily but nevertheless end up with subpar infrastructure quality. This suggests significant differences in the productivity of spending, although the analyses might be affected by the time lag between spending and outcomes.
Exhibit 166. Infrastructure quality vs. spending
1.2 High quality, high spending High quality, low spending
0.9 Japan Turkey 0.6 France South Africa China Germany Indonesia gap (%) gap 0.3
India ality Canada 0 UK Mexico United States
-0.3 Iinfrasructurequ
-0.6 Australia Russia Saudi Arabia Italy -0.9 Brazil Low quality, high spending Low quality, low spending -1.2 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Infrastructure spending gap (% of GDP) Source: World Bank, McKinsey Global Institute, Bahana
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PPPs are often discussed as a solution, but they are not a universal cure
A lot of institutions point to public-private partnerships as the solution for We found out that even in economies that closing infrastructure gaps during periods of tight public funding. However, make strong use of them, PPPs typically make we found out that even in economies that make strong use of them, PPPs up only 10-15% of overall investment in typically make up only 10-15% of overall investment in economic economic infrastructure infrastructure. Particularly in developed economies, classic corporate infrastructure investment by telecom operators or electricity and water utilities typically dwarfs PPP investment.
Exhibit 167. PPP spending in advanced economies Exhibit 168. PPP spending in developing economies 18% 8.9% 8.8% 8.5% 6.4% 5.5%
16% 15.0% 14.6%
14% 13.1%
12% 10.9% 2010 2011 2012 2013 2014
10% PPP spending as % of infra spending in major developing countries 8.0%
8% 27 6.5%
5.7% 24
6% 5.0% 18 4.8% Greenfield 16
3.6% 14 4% 3.3% 10
2.5% Concession 9
8 7
1.4% 1.4% 1.3%
1.1% 1 1
2% 0.9% Divestiture 3 1
0.6%
0.3%
0.2% PPPspending as of infra % spending 0% Brazil Turkey India Mexico Russia China Australia Canada United States United Kingdom PPP spending 127 113 46 23 21 20 2010 2011 2012 2013 2014 (USDbn)
Source: International Institute for Sustainable Development (IISD), Bahana. Source: International Institute for Sustainable Development (IISD), Bahana
Box 2. Polarized opinions on PPPs
PPPs have been proclaimed as highly efficient options to the public sector, benefiting from (1) lower cost overruns, (2) more innovation, (3) more efficient construction and (4) an optimization of full life-cycle cost. They have also been criticized as being a waste of public money – they may provide 10-15% returns on private capital when public debt is available at lower rate. Black-and-white assessments miss many of the implications associated with PPPs, therefore we try to balance out between pro and cons of PPPs:
First, private-sector projects tend to be more efficient with more discipline applied to project preparation, fewer overruns and greater propensity to innovate (such as: finding ways to generate ancillary revenue in airports). It is important to note, though, that some of these advantages can also be captured via contractual structures (such as: “design-build-operate- transfer” model) without private financing.
Second, the cost of public capital is much higher than debt rates would indicate. When a publicly funded project is launched, many risks are not priced into the initial public borrowing costs – but for a fair comparison, they should be. In a PPP, the private partner may take on construction risk, for example, shielding the public sector from claims and overruns. But a publicly funded project puts these risks onto taxpayers, who often receive sizable bills for overruns well after the fact. In principle, higher private sector capital charges can thus be in line with the risk that the private partner assumes. In addition to the risks borne by taxpayers in publicly funded projects, it is important to consider the opportunity costs of directing tax and public debt funding to a given project when many priorities are competing for scarce resources.
In practice, PPPs do sometimes turn out to be a waste of money. Many factors skew rational value-for-money considerations towards or against the use of PPP structures. PPPs can often go wrong in the following circumstances: . When they are used as a vehicle to circumvent budget constraints and as off-balance-sheet financing. Some governments although accounting standards have improved, but in many cases, the door is still open for abuses. . When a lack of transparency or competition allows private partners to reap windfall profit margins. . When inappropriate risk transfers to the private sector.
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Nonetheless, PPPs are on the rise, and they account for a substantial share We conclude that PPPs are a tool for financing of infrastructure investment in certain emerging economies. In some cases, infrastructure projects that works well when the high share going to PPPs may reflect low levels of public investment more particular conditions exists: (1) the project than high levels of private financing. But we think PPPs can play an important makes economic sense, (2) there is clear and role – not only financially but also in terms of increasing efficiency and efficient process to select a partner, (3) there innovation in the sector. These arrangements have to be undertaken is appropriate risk transfer between the thoughtfully, as there have been many failures alongside the successes (see government and the partner and (4) there is a Box 2 above, “Polarized opinions on PPPs”). revenue stream to provide appropriate risk- adjusted returns Ultimately, we conclude that PPPs are a tool for financing infrastructure projects that works well when particular conditions exists: (1) the project makes economic sense, (2) there is clear and efficient process to select a partner, (3) there is appropriate risk transfer between the government and the partner and (4) there is a revenue stream to provide appropriate risk- adjusted returns. Given not all projects can meet these conditions, thus not all projects are well suited for PPPs.
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APPENDIX 2
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Indonesia infrastructure: Reform is on progress
Indonesia’s investment ratio has remarkably risen in recent years, even Indonesia’s investment ratio has remarkably exceeding the levels of before the 1997/98 crisis. Gross fixed capital risen in recent years, Indonesia’s overall investment (construction, machinery and equipment, transport and capital stock ratio-to-GDP has risen from an equipment) grew by an average annual growth rate of 8% between 2001 estimated 1.7x in 1995 to 2.1x GDP in 2011 and 2011, leading to nominal investment ratio of 33% of GDP in 2012 and contributing to Indonesia’s high economic growth during that period. As a result, Indonesia’s overall capital stock ratio-to-GDP has risen from an estimated 1.7x in 1995 to 2.1x GDP in 2011.
Exhibit 169. Investment ratio as % of nominal GDP Exhibit 170. Real growth of capital stock 35% 12%
10% 30%
8% 25%
6%
y growth y -
20% y
4% as a % of nominal % a nominal as GDP of 15% 2%
10% 0%
1995 2009 1993 1997 1999 2001 2003 2005 2007 2011 2013 2015
1993 1999 1995 1997 2001 2003 2005 2007 2009 2011 2013 2015 Investment ratio Indonesia total capital stock
Source: BPS, Bahana Source: IMF Investment and Capital Stock Dataset, Bahana
But we believe that improving the quality of investment will be even more important going forward as much of the capital stock increase has been related construction (housing, shopping outlets) while other forms of infrastructure investment have played a smaller role, as shown in the Exhibit 171 below.
Exhibit 171. Composition of investment Exhibit 172. Infrastructure capital stock growth 100% 14% 90% 12% 80% 10% 70% 8% 60% 6% 50% 4%
40% ygrowth
- y 30% 2% 0%
as a as of % investment total 20% 10% -2%
0% -4%
2003 2006 2009 2000 2001 2002 2004 2005 2007 2008 2010 2011 2012 2013 2014 2015 2016
1999 1996 1997 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Building Machinery and equipment Transportation Other Total capital stock Infrastrcuture capital stock
Source: BPS, Bahana Source: IMF Investment and Capital Stock Dataset, World Bank, Bahana
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Years of under-investment have led to a large infrastructure deficit
Under-investment in infrastructure has been a substantial drag on Under-investment in infrastructure has been a Indonesia’s growth over the past decade. Insufficient road capacity, over- substantial drag on Indonesia’s growth over crowded ports, under-developed rail transport systems and jam-packed the past decade airports have been oft-cited bottlenecks inhibiting the country from unleashing its full economic potential. Business surveys show that problems with transportation are among the worst business constraints for manufacturing firms. Household data also shows that one-quarter of urban populations and more than half of rural dwellers have poor access to transport services. Prohibitive transport costs undermine the competitiveness of firms. Raw material producers find themselves unable to tap growing opportunities linked to final consumer demand. It is cheaper to import products from China than to source them locally from Kalimantan or Sulawesi Island. Realizing Indonesia’s growth and structural transformation goals will depend, to a large extent, on closing the country’s large infrastructure gap.
Total infrastructure investment declined from an average 7% in 1995/97 to The level of investment in infrastructure in around 3-4% of GDP in recent years. The level of investment in Indonesia is much lower than in neighbouring infrastructure in Indonesia is much lower than in neighbouring countries countries such as Thailand and Vietnam, where such as Thailand and Vietnam, where it has exceeded 7% of GDP, not to it has exceeded 7% of GDP, China exceeded mention China where it has stood at 10% of GDP over the past decade. The 10% of GDP relatively low infrastructure investment in Indonesia has resulted in low real growth in the infrastructure capital stock (road networks, ports, power, telecommunications, waterways, etc) since the 1997/98 crisis.
An analysis done by the World Bank in 2014 (in its report titled “Indonesia: An analysis done by the World Bank in 2014 (in Avoiding the trap”) found out that Indonesia had lost >1% of additional its report titled “Indonesia: Avoiding the trap”) growth due to under-investment in the infrastructure sector. The World Bank found out that Indonesia had lost >1% of further highlighted that Indonesia’s core infrastructure stock, such as road additional growth due to under-investment in networks, ports, electricity, and telecommunication facilities, had not kept the infrastructure sector pace with economic growth. In real terms, the infrastructure stock grew by only 3% annually during 2001/11, against a real GDP growth of 5.3%. The slow growth in the infrastructure capital stock, in a context of high economic and vehicle fleet growth, contributes to serious major gaps, congestion problems, and poor logistic performance, seriously undermining productivity growth, competitiveness and poverty-reduction efforts. Assuming a causal relationship between changes in infrastructure capital stock and changes in output, had the growth rate in infrastructure capital stock stood at 5% instead of 3%, real GDP growth would have been 5.8%, a 50bps difference.
Although the responsiveness of growth to infrastructure differs across In per-capita terms, Indonesia’s public capital countries, the relationship is strongly positive, as shown in Exhibit 173 stock is estimated at around USD3,900 – about below. A comparison of public capital stocks across countries illustrates a third of the average for other emerging Indonesia’s large infrastructure deficit. In per-capita terms, Indonesia’s markets and developing economies (EMDEs) public capital stock is estimated at around USD3,900 – about a third of the and about an eighth of the corresponding average for other emerging markets and developing economies (EMDEs) and average for advanced countries about an eighth of the corresponding average for advanced countries. In absolute terms, the gap in infrastructure assets between Indonesia and other major EMDEs stood at about USD1.5tn in 2015. This figure would be even higher if it accounted for additional infrastructure investments that Indonesia will need to achieve for higher growth.
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Exhibit 173. Boosting public capital stocks is expected Exhibit 174. Overall infrastructure quality vs. public to have a positive impact on economic growth capital stock per capita
8.0% 7.0 7)
7.0% - 6.0 (1 6.0%
5.0
score score ygrowth - 5.0% 4.0 4.0% 3.0 3.0% Efficient frontier 2.0 2.0% Developing
Publiccapital stock y Emerging 1.0% 1.0
WEF's WEF's overall infraquality Advanced
0.0% - 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% - 10,000 20,000 30,000 40,000 50,000 Gross domestic product y-y growth IMF's public capital stock per capita (USDbn/capita) Source: IMF Investment and Capital Stock Dataset (2017), Bahana Source: IMF Investment and Capital Stock Dataset, World Bank, Bahana
Yet Indonesia has underinvested in public infrastructure, leading to a Indonesia has underinvested in public growing infrastructure deficit. Indonesia’s rate of growth in public capital infrastructure, leading to a growing stock per capita has generally fallen behind that of Vietnam, China, India infrastructure deficit and Malaysia. Public investments have also not kept pace with economic growth: despite robust GDP growth of 5.6% on average during 2005/15, Indonesia’s public capital stock grew 2.8% annually on average over the decade.
Exhibit 175. Indonesia’s public capital stock per Exhibit 176. Public capital stock per capita index – person is low vis-à-vis other countries, 2016 Indonesia grew more slowly relative to most peers 30,000 140
24,520 120 25,000 100 20,000 80
15,000 14,446 60
USD/capita 40 10,000
20 Publiccapital stock per capitaindex
5,000 3,889 0
2014 2015 2005 2006 2007 2008 2009 2010 2011 2012 2013 - Indonesia Emerging Advanced China Indonesia Malaysia Philippines Vietnam BRICS Source: IMF Investment and Capital Stock Dataset (2017), Bahana Source: IMF Investment and Capital Stock Dataset (2017), Bahana. Malaysia’s public capital stock per capita in 2015 is used as the base year of the index as it is the highest among EMDEs.
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Playing catch up
The Jokowi administration recognizes the need to address the infrastructure The Jokowi administration recognizes the need deficit as a national priority. As a starting point, the National Medium Term to address the infrastructure deficit as a Development Plan (RPJMN) estimates that IDR5.4tn (USD415bn or about national priority. However, even if the RPJMN half of Indonesia’s GDP) of additional investments in infrastructure are target is met, we believe closing Indonesia’s needed during 2015/19. This implies spending an average of USD83bn per large infrastructure gap will require far more year. Most of this spending is expected to occur in the transport sector, effort followed by electricity and water resources. However, even if the RPJMN target is met, we believe closing Indonesia’s large infrastructure gap will require far more effort. To illustrate, if public investment flows increase every year consistent with the RPJMN target (these projections are done by keeping public investment as a share of capital stock constant at 8% - USD83bn divided by USD984bn – the 2015 level of public capital stock in Indonesia) and some additional assumptions are made on depreciation rates and population growth (the average depreciation rate of public capital stocks for middle-income countries is used – 3.5% per annum; while population growth is assumed to be 0.8% every 4 years), it would take 20 years for Indonesia to reach the current stock of public capital in the average EMDEs. To be on par with the average advanced economy, it would take about 28 years.
Box 3. Indonesia needs significant infrastructure investment in transport, energy and water
Transport: Massive infrastructure gaps exist in the national road networks, airports, ports and urban transport. The current backlog of network capacity is estimated at about 20% or 16,000 lane km of road space. To cater to an estimated growth of 5% in traffic demand, an estimated 3,000-4,000 lane km of road space needs to be added annually. The Expressway Development Program, targeting over 6,220km of expressways by 2025, is estimated to cost IDR720tn (USD54bn). In the ports sector, an estimated USD47bn is needed up to 2030 for port development. A further USD7-13bn is needed for mass transit investments, as RPJMN aims to increase the percentage of trips occurring on public transport in large cities from 5- 20% to at least 32%.
Electricity: Demand has grown at 7.1% annually on average since the late 2000s. The Indonesian government estimates that electricity demand will grow about 8.8% per annum on average between 2015/45F, i.e. an increase in power production from 219.1 to 464.2 terawatt hours (TWh) is required to meet the expected demand. The Indonesian government also estimates that investment expenditures for power infrastructure (generation, transmission, and distribution) will total USD95bn between now and 2025.
Water and sanitation: The RPJMN calls for an investment of around IDR253tn (USD20bn) over five years. The Ministry of Public Works projects that the largest share (47%) of the investment will come from local governments, and the remainder from private sector and bank financing.
Closing the infrastructure gap will require increased private sector involvement
Recognizing the need to address the large infrastructure deficit, central and Recognizing the need to address the large subnational governments have increased capital expenditures in recent infrastructure deficit, in 2016, the central years. In 2016, the central government spent IDR166.4tn (USD12.5bn) on government spent IDR166.4tn (USD12.5bn) capital expenditures, a tenth of total expenditures. Capital expenditures on capital expenditures, a tenth of total have been increasing in nominal terms, notwithstanding substantial expenditures injections to SOEs mostly to undertake priority infrastructure projects. In 2016, such injections amounted to IDR50.5tn (USD3.8bn). Subnational capital expenditures have also increased, amounting to an allocated IDR250.6tn (USD18.8bn) in the same year.
Collecting more revenues would help the government spend more on infrastructure, but even then, public resources would not be sufficient to meet infrastructure needs. The government aims to raise the tax ratio by 1ppt of GDP per year until 2020, and part of these additional revenues could be allocated to infrastructure projects. However, even in the hypothetical
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scenario where all new government receipts in 2018/19F are allocated to Total capital expenditure from 2015/19F would infrastructure, total capital expenditures over 2015/19F would only amount only amount to IDR1,497tn (USD112.6bn), far to IDR5,180tn (USD389.5bn). This is far from USD1.5tn needed to catch up from the RPJMN target and even further from with other emerging-market peers. In a more realistic, but still optimistic the aim of narrowing the infrastructure scenario where a fifth of all new revenues in 2018/19F are spent on disparity of USD1.5tn with other EMDEs infrastructure, total capital expenditure from 2015/19F would only amount to IDR1,497tn (USD112.6bn), far from the RPJMN target and even further from the aim of narrowing the infrastructure disparity of USD1.5tn with other EMDEs.
Closing Indonesia’s infrastructure gap with other EMDEs will thus require Closing Indonesia’s infrastructure gap with increased private-sector investment. This is not only due to limited public other EMDEs will thus require increased resources, but due to the efficiency gains that the private sector can bring. private-sector investment Efficiently allocating risks between the public and private sectors can significantly enlarge the size of the pie of infrastructure that can be built for a given level of fiscal commitments and risks, potentially leading to a faster expansion of infrastructure services. In addition, the private sector can presumably help to deliver infrastructure services at better value for money than traditional government procurements. In OECD countries, infrastructure projects involving PPPs are more likely to conclude on budget and on time. Studies from developing countries also show that private- sector participation in telecommunications, electricity and water distribution tend to elevate labor productivity and operational efficiency.
Several constraints need to be addressed to leverage private- sector financing for infrastructure
In Indonesia, the private sector faces four key challenges when looking to In Indonesia, the private sector faces four key invest in infrastructure. First, the complex legal landscape for PPPs has challenges: (1) the complex legal landscape for resulted in project delays and cancellations, acting as a disincentive to new PPPs, (2) the multitude of different actors and investments. Second, the multitude of different actors and lack of lack of standardized processes, (3) the standardized processes at the project identification, planning and dominance of SOEs in infrastructure, and (4) preparation stage has resulted in few attractive projects being put to the local debt and equity-market limitations market. Third, the dominance of SOEs in infrastructure provision risks crowding out the private sector. Fourth, local debt and equity-market limitations make it difficult for private-sector players to access long-term local currency financing. We discuss each of the constraints in detail below.
#1: Legal and regulatory uncertainty dampen private-sector interest Indonesia has many laws, regulations, and Indonesia has many laws, regulations, and decrees relating to PPPs, decrees relating to PPPs, resulting in a complex resulting in a complex legal framework that creates confusion among legal framework that creates confusion among investors and contracting agencies. There is no overarching law that governs investors and contracting agencies PPPs; rather, various regulations legislate on particular aspects of the project preparation and procurement cycle. The PPP legal framework comprises: (1) main PPP regulations, (2) sector specific laws (SSL) and (3) other PPP laws. In the first category alone, it is reported that there are 158 national laws and regulations that are relevant to PPPs. Some of those laws overlap or are inconsistent, and the interplay between more general PPP laws and SSL is often unclear. Compounding this issue is that the main PPP regulations generally have a lower position in the legislative hierarchy compared to most SSL. When these PPP regulations conflict, PPP projects are thus delayed until the relevant SSL is amended or special rulings are issued, or eventually cancelled. Amending SSL involves a variety of Indonesia’s ministries, and thus requires inter-ministerial coordination, which makes the process time- consuming and unpredictable. The sheer complexity of the legal framework is daunting for all those involved in the development of PPPs, and has led to a lack of coordination and confusion along the project cycle.
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Poorly designed tariff regulations in certain sectors may also dampen private-sector interest. In the water sector, average tariffs paid by customers to water utilities is USD0.28 per m3, which is seemingly low and partly explains the insufficient interest of private-sector financiers/ operators. In the power sector, the current methodology for determining electricity tariffs to some degree does not inventivize the national power utility (PLN) to improve efficiency, in our opinion hampering its credibility as a partner for independent power producers (IPPs). Under the current cost plus 7% margin formula, PLN is compensated irrespective of whether the costs are efficiently incurred, which promotes cost inflation. Moreover, uncertainty regarding tariff setting and frequent revisions can also discourage private investment. In January 2017 for example, the Ministry of Energy and Mineral Resources (MEMR) reduced feed-in tariffs for renewable energy sources, following complaints from central and local governments that feed-in tariffs enacted in 2014 were too high.
Box 4. Some PPP projects have encountered difficulties due to legal and regulatory constraints
Restrictions on private sector participation: In February 2015, the Constitutional Court invalidated Law No. 7/2004 on Water Resources due to a broad reading of Article 33 of the Constitution which states that “the land, the waters and natural resources within shall be used under the powers of the State and shall be used to the greatest benefit of the people”. Following this decision, PPP projects of PT PAM Lyonnaise Jaya (Palyja) and PT Aetra Air Jakarta were cancelled. Under the new set of regulations, the private sector is not permitted to operate distribution networks in water projects. The Constitutional Court has also invoked Article 33 several times to prevent establishing an independent regulator, liberalizing electricity markets or privatizing state-owned enterprises involved in energy production. Implication: We believe since private-sector participation is governed by sector-specific laws, investors may fear that the Constitutional Court may also invalidate private-sector participation in other public goods, creating long-term uncertainty.
Overlapping laws on local parliament approval: By law (Government Regulation No. 50/ 2007), any regional government that plans to enter into a PPP agreement with a private-sector entity and requires regional budget funding/ support must seek local parliament approval prior to entering into any such agreement. As part of this process, a draft PPP agreement must be submitted to the local parliament for review. However, Ministry of Home Affairs Regulation No. 96/ 2016 requires regional governments to obtain local parliament approval of the project’s availability payment mechanism in the relevant fiscal year of payment. It is thus unclear whether local parliament approval before entry into a PPP agreement includes a long-term regional budget commitment throughout the life of the PPP agreement, or whether such budgetary approval needs to be obtained each fiscal year of payment. Implication: Securing local parliament approval after the completion of construction work is a considerable risk for PPP project (e.g. Bandung waste-to-energy project was suspended due to failure to obtain such approval). Private-sector bidders will be wary of entering a bid which might subsequently never receive approval on its proposed payment mechanism.
Separate requirements for the outline business case (OBC): Indonesia’s Ministry of National Development Planning (Bappenas) and the Ministry of Finance (MoF) have separate requirements for the preparation of the OBC, i.e. preliminary feasibility study. This is cumbersome as all government contracting agencies (GCAs) need to prepare the OBC for a PPP project in accordance with the requirements set out by Bappenas, but must also submit the OBC to the MoF in accordance with their requirements if viability gap funding (VGF) is needed. Although the requirements appear to overlap substantially, complying with MoF requirements can require significant additional effort, e.g. social cost and benefit analysis, financial model, and analysis indicating that VGF is the last resort. Implication: Complying with two separate requirements is time-consuming for GCAs, and could slow down the project preparation process.
#2: Lack of incentives and capacity to identify well-prepared, commercially viable projects throughout the project cycle Identifying, selecting and preparing viable PPP projects for the market Identifying, selecting and preparing viable PPP involves multiple actors at both the regional and central levels. By projects for the market involves multiple actors regulation, new infrastructure project proposals must originate from at both the regional and central levels Government Contracting Authorities (GCA) in the sector or region where the project is located. GCAs are responsible for all aspects of project preparation, from preliminary studies through to the completion of outline business cases
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(OBCs), procurement and implementation. Projects that GCAs identify as potential PPPs are forwarded to Bappenas, the national central planning agency, which is responsible for screening these proposals and assisting GCAs in the development of OBCs. Based on the project proposal documents received, Bappenas identifies a selection of projects for publication in the annual PPP book. After MoF approves the OBC, GCAs may apply for project development funding from the MoF’s Project Development Facility. The MoF also decides which projects will receive Viability Gap Funding (VGF) and endorses the use of Availability Payments (APs) if relevant. The MoF can also assign other infrastructure financing vehicles – e.g. the Infrastructure Financing Facility (IIF), PT SMI, and the Indonesia Infrastructure Guarantee Fund (IIGF) – to provide technical advice and other assistance on project preparation, procurement and transaction.
Box 5. Indonesian government has developed several financing instruments to support PPP implementation
The Indonesian government has developed a series of fiscal and contracting tools to facilitate the participation of the private sector and enhance the viability of potential PPP projects. Specifically, the Indonesian government introduced: 1) Project Development Fund at the MoF to support the hiring of professional transaction advisors for the early-stage development of infrastructure projects identified to be developed as PPPs. 2) Viability Gap Funding – this is the government’s contribution for part of the cost of constructing a PPP project that is economically but not commercially viable. In effect, it provides a capital subsidy to buy down the cost of projects. 3) Government Guarantees to cover political and government performance risk. 4) Availability Payment Scheme – this is a periodic payment by the Minister/ Chairman/ Head of the Region to a private entity for providing infrastructure services that conform to the quality and/or criteria specified in the PPP agreement.
The VGF and AP instruments are starting to be implemented by the Indonesian government on specific projects (e.g. VGF on the Umbulan Water Project, AP for the Palapa Ring national fibre-optic backbone network project), but are not yet widely applied. Part of the issue is that they are relatively new instruments (VGF introduced in 2012/13 and AP in 2015), so their uptake may be a matter of time. However, the regulations and accounting standards for these instruments are perceived as overly complex by GCAs, exacerbated by the fact that both tools are regulated and administered by different directorate generals within the MoF. It is also not possible to blend both instruments, i.e. utilize the the VGF to subsidize a portion of the AP to make a PPP viable.
From project identification to planning and preparation, there is no clear There is no clear process for allocating projects process for allocating projects between the public and private sectors. GCAs between the public and private sectors have limited liability to effectively analyse the viability of projects, and rarely prepare robust preliminary studies on implementation of potential PPPs (e.g. financial viability, overarching need, a demonstration of value for money). Only a handful of projects that GCAs pass on to Bappenas have underlying data (e.g. estimated cost, revenue forecasts) and demonstrable commitment from the GCA project owner. Moreover, procurement regulations and remuneration caps prevent GCAs from hiring qualified international advisors to prepare projects to an adequate standard that can attract private financing. Since project preparation costs are considered part of GCAs’ capital expenditures, there is little incentive for GCAs to fund seemingly high-cost studies that do not immediately achieve physical targets
(e.g. an increase in the project size or scope). GCAs are thus reluctant to incur expenses upfront to make projects commercially viable and allow for internationally competitive tenders that would attract sufficient competition and quality investors.
Due to staffing and budget constraints, Bappenas’ PPP unit does not have the capacity to actively screen each proposal before it is inserted into the PPP book. This has resulted in few projects in the PPP book going to implementation as a PPP. Moreover, the proliferation of different but often overlapping PPP project lists is causing the market to lose confidence in the PPP book. While Bappenas does have a limited budget to support the GCAs
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in completing OBCs, it lacks sufficient resources to make up for the relative lack of project preparation on the part of GCAs.
Indonesia has made strides in developing the institutional framework to fund Indonesia has made strides in developing the and finance infrastructure, but bureaucracy and the lack of appropriate institutional framework to fund and finance implementation mechanisms to create robust project pipelines (regardless infrastructure, but bureaucracy and the lack of of whether they are funded by the public or private sector) have marred the appropriate implementation mechanisms to implementation process. Although different government support create robust project pipelines (regardless of instruments (VGF, AP, etc) have been developed, different departments in whether they are funded by the public or the MoF assign projects to each fund without a coordinated assessment. private sector) have marred the Since this array of government support is available only through a implementation process centralized process, there is some concern that the availability of government support is what is incentivizing GCAs to submit for projects for PPPs, with the result that only those projects that need government support to make them commercially viable are being designated as PPPs.
These weaknesses in project planning, appraisal and quality assurance have led to the most commercially viable projects being implemented through public procurement or being directly assigned to SOEs. However, to maximize aggregate financing for infrastructure development, private financing should be sought first and foremost for thoroughly prepared, bankable projects, with instruments such as VGF, AP and government guarantees reserved for judicious use to improve the attractiveness of projects that involve inherent risks.
#3: Legal and regulatory uncertainty dampen private sector interest Driven by the aim of accelerating infrastructure development, the Driven by the aim of accelerating infrastructure government has mainly relied on SOEs to execute Indonesia’s ambitious development, the government has mainly infrastructure plans. This approach is largely a pragmatic response to the relied on SOEs to execute Indonesia’s urgent need for new capacity, as well as a means of circumventing existing ambitious infrastructure plans inefficiencies in the project cycle. SOE’s procurement process is faster, and they are more willing and able to take on more risks than a typical private sector peer. We also view that they are willing to take on non-commercial projects as part of their mandate as ‘agents of development’.
Despite their prominence, since SOEs rely heavily on public finances and need to adhere to single borrower limits of local banks, SOEs face limits on how much they can ramp up infrastructure spending. SOEs have access to a variety of explicit government subsidies (e.g. to carry out public service obligations) and implicit subsidies (e.g. government guarantees and equity injections). However, the government has limited the use of capital injections in 2017 and needs to ensure that the fiscal deficit does not exceed 3%. The constraints further strengthen the case that greater private investment in infrastructure is needed.
Given their dominance, and creating a crowding-out effect, SOEs and their lenders/guarantors may pay less attention to the commercial viability of projects because of the expectation that any corporate loss will be covered by the state budget. In toll-road tendering, for example, the acceptable internal rate of return for SOEs can be as low as 13%, whereas private- sector competitors aim at 16%, based on our channel checks. Below-market required rates of return may also give SOEs an unfair advantage over their competitors. Directly assigning infrastructure projects to SOEs may also have deterred the private sector from infrastructure investment. In the case of ports, for example, many new developments of key commercial ports have been directly assigned to the Pelindos in recent years. These direct assignments create the market perception that the more viable projects are assigned to SOEs, further deterring private-sector interest.
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#4: Long-term instruments for local currency financing of infrastructure projects are limited Given that revenues for many infrastructure projects in Indonesia are usually Given that revenues for many infrastructure IDR-denominated, long-term local currency financing instruments are critical projects in Indonesia are usually IDR- to attract private sector players. This is not only to avoid the volatility denominated, long-term local currency associated with international financial markets, but also to mitigate foreign- financing instruments are critical to attract exchange risks and the high cost of international finance due to high country private sector players risk premiums and foreign-exchange hedging. However, Indonesia debt and capital markets are still relatively nascent, limiting the availability of long- term IDR financing. We discuss a selected number of challenges that hamper the entry of private investment into infrastructure in this section.
The Indonesian banking sector is relatively small at around half of GDP, less than many neighbouring countries and other large emerging markets (Exhibit 177). Based on our calculation, attaining a banking system of a broadly comparable size (relative to GDP) by 2019/20F would require banking assets to grow 20-25% per annum; however, they only grew 6% from 2015/16 and 9% in the previous year. Moreover, local lending is also highly concentrated: the four biggest banks (BMRI, BBRI, BBNI and BBCA) account for half of total banking assets and dominate the supply of IDR financing to the infrastructure sector. These banks benefit from comparably high net interest margins, which may provide little incentive for them to innovate and expand product offerings.
Exhibit 177. Indonesia’s banking sector is relatively Exhibit 178. … and banking assets are fairly small compared to peers … concentrated 2.0 1.8 1.8 1.6 BMRI; 16% 1.4 1.1 1.2 1.1 Others; 31% 1.0 1.0 0.9 0.8 BBRI; 15% 0.8 0.5 0.6 BJTM; 1% 0.4 BTPN; 1% BBCA; 11%
ratio of banking assets to GDP (x) 0.2 BBKP; 2% - BJBR; 2%
BBNI; 10% india
Brazil BDMN; 3%
Mexico
Thailand Malaysia Indonesia PNBN; 3% BBTN; 3% BNGA; 4% Philippines Source: World Bank, IMF, Bahana Source: Bank Indonesia, Bahana
The banking sector is also substantially segmented, which limits the liquidity The SOE banks are more focused on supporting available for infrastructure lending. The SOE banks (BMRI, BBRI and BBNI) SOEs and strong corporate names are more focused on supporting SOEs and strong corporate names. Less well-established private-sector sponsors are unlikely to get funding from SOE banks, and larger private local banks (in particular BBCA) and foreign banks are highly selective. Much of debt financing to infrastructure projects is done through corporate lending, based on the strength of borrowers’ balance sheets and often on a relationship basis. This means that: (1) the amount that can be borrowed by private sponsors is limited by their balance sheets, and (2) SOEs often have an advantage, as banks are more willing to lend to them due to perceived lower risk (given state ownership).
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Although the infrastructure sector is the second largest source of corporate Although the infrastructure sector is the second bond issuance with 16% of total bonds outstanding (Exhibit 179), the bond largest source of corporate bond, the bond market is mostly accessible only to large, well-known entities. New market is mostly accessible only to large, well- infrastructure projects have so far been unable to raise funding from this known entities source unless the fundraising is done by companies that already have sizeable operating assets. This is because stand-alone projects, especially greenfield ones, typically carry too much risk for bond investors, who tend to be more receptive to SOEs and well-known corporates.
Exhibit 179. The infrastructure sector is the second Exhibit 180. A third of pension fund assets are invested largest source of corporate bonds issuance in bank deposits with relatively short-term gains
Basi industry and Trade, services and Land and Others; 4% chemicals; 3.2% investment; 3.0% buildings; Mining; 2.6% 6%
Consumer Mutual fund; goods; 2.5% 6% Property, Deposit and real estate savings; 28% and Infrastructure, construction; Shares; 12% utilities, and 6.9% transportation; 16.0%
Finance; Bond and 65.6% Government sukuk; 22% bond; 23%
Source: IDX Source: OJK, Bahana
Institutional investors (pension funds, social security, and life insurance Institutional investors with longer-term companies) with longer-term liabilities are well-positioned to make liabilities are well-positioned to make infrastructure investments. However, the domestic institutional base in infrastructure investments; however, the Indonesia is also small compared to neighbouring countries and to the size domestic institutional base in Indonesia is also of domestic funding needs. Together, social security funds, private pension small compared to neighbouring countries and funds and the insurance industry’s collective investments amount to to the size of domestic funding needs IDR1,400tn (around 12.3% of GDP) or USD100bn. Pension fund assets (public and private combined) are 5% of GDP, well below the Philippines (10% of GDP) and Malaysia (40% of GDP). Moreover, most assets of institutional investors are invested conservatively with a relatively short- term perspective. For example, nearly 30% of pension fund assets are invested in bank deposits (Exhibit 180).
Securitization may be an effective means of mobilizing private investment in infrastructure, but has only started to gain ground in Indonesia recently. Although a regulatory framework for domestic securitization was established in 2008, only one type of securitization (mortgage-backed securities) had been issued up until recently. Securitization backed by other types of assets or by other entities had not materialized. However, as many SOEs have started to feel the pressure on their balance sheets, securitization is now being actively pursued. In August 2017, an infrastructure-based securitization of IDR2tn was issued, backed by future revenues of the Jagorawi toll road operated by JSMR. It is unclear, however, whether the challenges in the enabling environment have been adequately and comprehensively address. Also, the investor base has yet to be diversified, as it largely targets the same pool of domestic investors.
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