SECTOR UPDATE REPORT MNC Sekuritas Research Division | November, 6 2018 CONSTRUCTION SECTOR UPDATE Serene, Until The Moment is Back 3Q18 Result: Positive Performance, while New Contracts still Below Target The construction players reported a positive performance along 3Q18. Revenues were observed to increase an average by 20.67% YoY (vs 61.30% YoY in 3Q17), reflecting 64.03%/63.00% of the MNCS/Consensus target. Meanwhile, average net income increased to 18.76% YoY (vs 96.22% YoY in 3Q17), reflecting 63.86%/58.27% of the MNCS/Consensus target. Although it continues to grow, we assess the performance of the construction sector beginning to slow down, as a result of few contracts secured in 3Q18 only 39.47% of the companies target. Construction companies are thus currently focusing on projects acquired in a previous period. Threats and Opportunity in Political Year Historically, incumbent tends to indulge in populist expenditures ahead of general elections. In doing so, it reveals a tendency to starve the infrastructure budget, shifting funds to the subsidy budget–particularly energy subsidies, which were observed to increase by 90.83% YoY in FY07- FY08 and 53.16% YoY in FY12-FY13. Infrastructure development tends to trend downward and stagnate in a political year, as indicated by a -5.74% YoY decrease in new contract value during the FY09 election. However, the value of new contracts was observed to recover gradually post- election, up by 10.59%/48.66% YoY in FY10/FY11 YoY, reviving attractiveness of the construction sector. The same trend occurred in FY17, where new contract value stagnate by 1.27% YoY. Thus we project new contract growth to stagnate in FY18E to FY19F, with just +0.15% YoY in FY19F, as there will be an election in FY19F. New contract value is expected to rise again in FY20F/FY21F, along with the development of infrastructure as an economic driver. Funding issues Persist a Main Focus Funding is still a major challenge in the construction sector, as the APBN has not been able to raise cash for all PSN projects, signifying money has to be sought from three institutions: 1) Government, with a portion of 12.50%; 2) SOEs at 29.97%; 3) The private sector at 57.51%. In its effort to realize PSN construction, the Government has set aside IDR525 trillion in funds from the state budget. NEUTRAL Recommendations with Selected Stock: PTPP and WSBP We consider that construction sector growth will be relatively limited from FY18E until 1H19F, due to: 1) Limited infrastructure funding ahead of elections; 2) FDI, as one of the funding sources, not having shown a significant increase; 3) Volatility of the Rupiah exchange rate. We thus maintain a NEUTRAL rating for the construction sector, with PTPP (BUY TP; IDR 2,050) and WSBP (BUY TP; IDR 500) as top picks. Market Cap P/E (x) PBV (x) Target Price Ticker Rec. (IDR bn) FY18E FY19F FY18E FY19F (IDR) ADHI 4,629.10 7.03 8.89 0.71 0.67 BUY 1,740 Research Associate PTPP 8,896.85 5.39 5.25 0.56 0.51 BUY 2,050 Muhamad Rudy Setiawan WIKA 10,853.64 8.30 6.27 0.78 0.71 BUY 1,850 [email protected] WSKT 20,700.22 4.67 4.85 1.61 1.33 BUY 2,115 (021) 2980 3111 ext. 52317 WSBP 8,453.57 6.68 5.84 0.98 0.84 BUY 500 Sources: Bloomberg, MNCS (as of November 5 2018) www.mncsekuritas.id MNC Sekuritas 1-500-899 [email protected] Page 1 Please see important disclaimer at the back of this report Sector Update Report | MNC Sekuritas Research Division Positive Performance, The construction players reported a positive performance along 3Q18. Revenues were while New Contracts observed to increase an average by 20.67% YoY (vs 61.30% YoY in 3Q17), reflecting still Below Target 64.03%/63.00% of the MNCS/Consensus target. ACST led the highest 3Q18 revenue growth at 40.54% YoY, followed by WIKA (32.30% YoY), WSKT (26.98% YoY), WSBP (8.53% YoY) and ADHI (8.23% YoY). Meanwhile, PTPP reported the lowest growth compared to peers at just 7.45% YoY. Furthermore, average net income increased to 18.76% YoY (vs 96.22% in 3Q17), reflecting 63.86%/58.27% of the MNCS/Consensus target. ADHI booked high net profit growth compared to others 63.61% YoY in 3Q18, followed by WSKT (43.83% YoY), WIKA (26.05% YoY) and WSBP (7.23% YoY). While PTPP and ACST net profit slid by -11.65%/-16.50% YoY, due to increase interest expenses, to 94.98%/302.18% YoY respectively in 3Q18. Although it continues to grow, we assess the performance of the construction sector beginning to slow down, as a result of few contracts secured in 3Q18 only 39.47% of the companies target. Furthermore, top-line and bottom-line growth in 3Q18 were uninspiring compared to previous period 3Q17 top-line and bottom-line averages grew 61.30%/96.22% YoY. Exhibit 01. MNCS Forecast vs Consensus Revenue (IDR bn) Growth Achievement Avg.3yrs Net Income (IDR bn) Growth Achievement Avg.3yrs Company 9M18 9M17 3Q18 2Q18 YoY QoQ MNCS Cons 9M15-9M17 9M18 9M17 3Q18 2Q18 YoY QoQ MNCS Cons 9M15-9M17 ADHI 9,432 8,715 3,349 2,941 8.23% 13.89% 45.77% 51.96% 55.55% 336 205 123 139 63.61% -11.90% 51.96% 43.29% 35.46% ACST 2,734 1,945 1,075 925 40.54% 16.18% 80.78% 74.77% 66.34% 93 111 19 35 -16.50% -43.59% 50.83% 44.25% 54.02% PTPP 14,787 13,762 5,280 5,824 7.45% -9.34% 56.48% 55.15% 63.87% 875 990 395 324 -11.65% 22.02% 53.75% 51.45% 58.26% WIKA 21,004 15,876 8,026 6,720 32.30% 19.44% 66.50% 76.20% 59.89% 860 683 343 346 26.05% -0.82% 76.20% 55.16% 54.41% WSBP 5,439 5,011 1,593 1,550 8.53% 2.76% 64.00% 63.09% 67.77% 885 825 736 1,470 7.23% -49.90% 70.51% 71.94% 80.83% WSKT 36,233 28,534 13,333 10,503 26.98% 26.94% 70.65% 71.21% 58.15% 3,727 2,591 194 180 43.83% 7.98% 89.20% 83.56% 55.62% Source : Company, MNCS Exhibit 02. New Contract Achievement in 3Q18 3Q18 2018E 80,000 70,000 60,000 50,000 40,000 IDRBn 66.09% 30,000 44.23% 20,000 49.57% 16.66% 8.13% 52.11% 10,000 0 PTPP WSBP ADHI WIKA WSKT ACST Source : Company, MNCS www.mncsekuritas.id MNC Sekuritas 1-500-899 [email protected] Page 2 Please see important disclaimer at the back of this report Sector Update Report | MNC Sekuritas Research Division Exhibit 03. Performance Companies in 9M18 Revenue Growth Net Income Growth 70% 63.61% 60% 50% 43.83% 40.54% 40% 32.30% 26.98% 30% 26.05% 20% 8.53% 8.23% 7.45% 7.23% 10% 0% -10% -20% -11.65% -16.50% -30% ADHI ACST PTPP WIKA WSKT WSBP Source : Company, MNCS Exhibit 04. Earnings Cycle Trend FY15-FY18E FY15 FY16 FY17 FY18E/MNCS FY18E/Cons 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% ADHI ACST PTPP WIKA WSKT WSBP average Source : Company, MNCS Exhibit 05. Debt to Equity Ratio in 3Q18 3 2.5 Max 2.5 2.23 2 1.5 1.35 1.34 1 0.95 0.82 0.75 0.5 0 WSKT ACST ADHI WIKA PTPP WSBP Source : Company, MNCS www.mncsekuritas.id MNC Sekuritas 1-500-899 [email protected] Page 3 Please see important disclaimer at the back of this report Sector Update Report | MNC Sekuritas Research Division PSN Target in FY19F, Currently, the construction players are still focusing on project acquaried in a Commitment to Realize 68 previous period. However, the Government's commitment, as displayed by the Project Committee to Accelerate Priority Infrastructure Provision (KPPIP) is to be able to complete 68 of the planned 245 National Strategy Projects (PSN). There are 30 projects in FY16-FY17, marking an investment of IDR94.81 trillion, 13 projects with an investment of IDR46.78 trillion in FY18E, and 25 projects valued at IDR118.88 trillion in FY19F. Exhibit 06. Project Realized in FY16-FY17 2016 Project Value (IDR Bn) Gempol Toll Road 1,470 PLBN & SP Belu 82 Juwata Airport 1,390 Fatmawati Soekarno Airport 1,670 Mutiara Airport 1,390 Matahora Airport 662 Labuan Bajo Airport 662 Terminal 3 Soekarno Hatta 4,700 Kalibaru Port 12,000 Pipe Gas Belawan 1,210 PLBN & SP Entikong 152 Sentani Airport 1,470 PLBN & SP Motamassin 128 PLBN & SP Skouw 166 Dum Paya Seunara 57 Dum Rajui 138 Dum Jatigede 4,820 Dum Bajulmati 454 Dum Nipah 213 Dum Titab 496 Total 33,330 2017 Project Value (IDR Bn) Soreang Toll Road 1,510 Mojokerto Toll Road 4,980 Road Acces Tj. Priok 6,270 Raden Inten II Airport 1,470 Field Jangkrik North East 45,500 PLBN & SP Nanga Badau 154 PLBN & SP Aruk 131 PLBN & SP Wini 130 Dum Teritip 262 Irrigation Umpu 1,078 Total 61,485 Source : KPPIP, MNCS www.mncsekuritas.id MNC Sekuritas 1-500-899 [email protected] Page 4 Please see important disclaimer at the back of this report Sector Update Report | MNC Sekuritas Research Division Exhibit 07.