INDONESIA CONSTRUCTION SECTOR OVERWEIGHT Sector Reinitiation | Construction Sector 26 Aug 2016 Rapid growth Michael Ramba [email protected] +6221 23587222 ext 201 Growing rapidly with infrastructure development We expect Indonesia construction sector to experience new contract growth of 28% CAGR 2015-2018F vs 19% CAGR 2011-2015, supported by more SECTOR PERFORMANCE government related project on infrastructure for the next three years. In the Mid-Term Development Plan (RPMJN) 2015-2019, the government targets to 7,500 reach IDR5,519tn infrastructure projects, which creates plenty of opportunities for SOEs construction companies to pursue new contracts 6,000 growth. At the same time, we are more positive with the government’s decision to increase the 2017 infrastructure budget to IDR346.6tn (17% of 4,500 total 2017’s government spending) vs. IDR313.5tn in 2016 (15% of total 2016 government spending). The higher budget disbursement from The 3,000 Ministry of Public Works and Public Housing (26.7 % vs 15.5% in 1H15) also indicates that tendering process is being accelerated, which should benefit 1,500 SOE construction companies. - Aug-15 Nov-15 Feb-16 May-16 Aug-16 Gaining momentum from tax amnesty program The infrastructure development in Indonesia has lost its momentum in the JCI CONSTR last two years due to limited availability of government fund, and slower economic growth. After becoming a president, Jokowi has showed its effort by extremely reducing energy subsidies, but unfortunately, was still insufficient. Another important move from Jokowi is the tax amnesty MARKET DATA program, which not only create more room to increase tax revenue, but will Absolute 23.1% 4.4% 13.8% 39.0% also generate liquidity from repatriated funds. From the IDR1,000tn JCI Return 18.5% 4.2% 14.0% 28.7% repatriated fund target, government plans to allocate at least IDR300tn to Relative 4.6% 0.2% -0.2% 10.3% SOEs (with priority to SOEs construction companies) through several instruments including bonds. This will create more liquidity for SOE construction companies in order to bid for larger infrastructure projects. Increasing leverage through rights issue plans After the approval of state capital injection (PMN), WIKA and PTPP are planning to conduct rights issue this year, with total fund raising of IDR10.5tn, including PMN. Note that WSKT and ADHI have previously obtained IDR8tn from their rights issue in 2015. The rights issue fund will not only strengthen capital structure, but also elevate companies’ leverage. With the scheme of 1:2, WIKA and PTPP will able to raise additional loan for up to IDR21.8tn to fund their priority projects and pursue larger-scale projects. Reinitiate with an Overweight, WIKA and ADHI as stock picks We reinitiate coverage on the construction sector with an OVERWEIGHT stance, as we believe that current valuation still has room for improvement. Despite the current valuation of 2017F’s 23x PE (slightly higher than +1 SD above mean), we believe there is still an upside potential from the strong new contract growth and solid earnings outlook (32.9% CAGR 2015-2018). We like WIKA and ADHI as our stock picks because both of them have: i) stronger new contract growth compared to peers, and ii) high exposure on the government’s strategic projects including and HSR and LRT. Exhibit 1. Sector comparison TP CP NP (IDR bn) EPSG (%) PER (x) PBV (x) ROE (%) Div Yield (%) Ticker Rating (IDR) (IDR) 2016F 2017F 2016F 2017F 2016F 2017F 2016F 2017F 2016F 2017F 2016F 2017F WSKT BUY 3,400 2,780 1,527 2,077 45.7 36.1 24.7 18.2 3.5 2.5 12.6 16.0 0.9 1.2 WIKA BUY 4,100 3,270 868 1,128 38.9 29.8 23.1 17.8 3.5 3.4 15.7 19.5 1.1 1.4 PTPP BUY 5,600 4,650 995 1,328 34.3 33.6 22.6 17.0 4.3 4.1 20.1 25.9 0.6 0.8 ADHI BUY 3,700 2,800 541 859 16.8 58.6 18.5 11.7 1.9 1.9 9.3 14.2 0.8 1.2 WTON HOLD 975 950 336 403 35.5 7.2 34.3 32.0 3.4 3.1 10.0 10.8 1.0 1.2 Source: Companies, BCA Sekuritas Massive support from infrastructure development Infrastructure development has become the government limelight following increasing government budget for infrastructure projects over the past three years. President Jokowis’s program to boost infrastructure development has created a positive impact to overall construction sector, as well as its stock price performance. From 2013 to Jul-16, stock prices of four SOE construction companies grew by more than double. We think the infrastructure development will remain as the government’s priority, which is in line with government’s commitment to provide a better infrastructure in the next three years. We believe this will directly benefit SOE construction companies such as WIKA, WSKT PTPP and ADHI given their records of accomplishments. Exhibit. 2 shows that the construction sector has become the driving force of JCI movement within the last 3 years. With the government priority to push infrastructure development in the country, we think it may have some more to go. Exhibit 2. JCI index vs construction sector 8,000 6,000 4,000 Construction sector has outperform JCI by 6.74% YTD 2,000 - JCI CONSTR Source: Bloomberg Exhibit 3. Jakprop index vs construction sector 700 600 500 Construction sector also grows 400 faster than property sector in the 300 last 2 years. 200 100 - JAKPROP CONSTR Source: Bloomberg Five SOE construction companies (WIKA, WSKT, ADHI, PTPP, and WTON) have also grown faster than JAKPROP index in the last three years. Total new contract achievement of four SOE companies grew by 19 % CAGR 2011-2015. The top line numbers of the five companies also grew by 16% CAGR 2011-2015, while net profit growth was reported at 29% CAGR during the same period. 2 Exhibit 4. Price performance of five construction companies 5,000 4,500 4,000 3,500 Construction companies’ prices 3,000 ADHI moved faster in the last three 2,500 PTPP years 2,000 WIKA WSKT 1,500 WTON 1,000 500 - Source: Bloomberg We forecast top line growth of 29% and net profit of 32% CAGR for 2015- 2018F. We believe the sector remains attractive for the next three years due to: i) President Jokowi’s program to push infrastructure projects such as toll roads, ports, bridges and power plants until 2019, which will directly benefit SOE construction companies, ii) SOE construction companies’ strong ability to win larger scale projects on the back of strong capital from additional state capital injection (PMN) and rights issues. Note that WSKT and ADHI have done their rights issue last year, while WIKA and PTPP plans for rights issue this year. Exhibit 5. New contract growth (IDRbn) 215,786 183,026 2% 3% 151,153 38% 3% 38% 101,842 36% SOE construction companies to 75,276 3% 27% 64,344 28% book new contract growth of 61,057 32% 3% 28% 49,427 4% 4% 30% 28% CAGR 2015-2018F 20% 21% 25% 4% 21% 20% 28% 23% 20% 28% 21% 27% 27% 25% 32% 30% 27% 11% 24% 16% 17% 16% 14% 12% 11% 2011 2012 2013 2014 2015 2016F 2017F 2018F ADHI PTPP WIKA WSKT WTON Source: Companies, BCA Sekuritas Exhibit 6. Revenue growth forecast (IDRbn) 117,198 95,693 4% 76,361 4% 31% 54,033 5% 32% Revenues are expected to grow 47,108 by 29% CAGR 2015-2018F 45,672 31% 25% 36,376 5% 24% 29,578 6% 7% 26% 24% 6% 21% 22% 25% 24% 6% 24% 26% 26% 24% 25% 27% 25% 26% 26% 26% 22% 26% 21% 16% 16% 23% 21% 21% 18% 17% 16% 2011 2012 2013 2014 2015 2016F 2017F 2018F ADHI PTPP WIKA WSKT WTON Source: Companies, BCA Sekuritas 3 Exhibit 7. Net profit forecast (IDRbn) 6,949 4% 5,397 4% 31% 4,175 We forecast net earnings to grow 5% 32% 3,051 by 32% CAGR 2015-2018F 31% 25% 2,008 2,301 5% 26% 24% 1,431 7% 1,092 6% 24% 21% 22% 24% 6% 25% 24% 24% 26% 26% 25% 25%6% 26% 26% 27% 26% 26% 21% 22% 16% 16% 23% 21% 21% 18% 17% 16% 2011 2012 2013 2014 2015 2016F 2017F 2018F ADHI PTPP WIKA WSKT WTON Source: Companies BCA Sekuritas On segment basis, we forecast construction revenue to grow by 31% CAGR 2015-2018F vs 15% CAGR 2011-2015, as we expect higher total order book from more participation in large infrastructure projects within the next three years. Secondly, we expect SOEs construction companies will be more aggressive in tendering participation in several EPC projects from both government and private sectors that translates to EPC segment’s growth of 28% CAGR 2015-2018F. Thirdly, we believe higher construction projects will elevate precast concrete demand. We expect WTON and Waskita Beton Precast (WBP) will dominate precast concrete business in the future. With the higher production capacities compared their peers, we estimate WTON and WBP to command around 74% of precast concrete industry, assuming overall production capacity to increase to 7mn tons/year in 2017. We see the aggressive expansion in the production capacity from both companies will generate higher precast revenue. We forecast precast revenue of the sector to grow by 22% CAGR 2015-2018F. Exhibit 8. Construction segment forecast (IDRbn) 32,604 27,170 Higher new order book will lead to higher contribution of 22,514 construction segment.