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Indonesia Construction
Refer to important disclosures at the end of this report
Page 2
Industry Focus
New contract growth to peak out; execution to take the awarded the Rp15.8tr Jakarta-Bandung HSR civil works
spotlight construction contract. As new contracts are peaking out this
year, project execution and earnings delivery would take the
The three state-owned contractors under our coverage spotlight.
booked Rp47.5tr worth of new contracts in 5M17, a 71%
increase y-o-y. This was driven largely by SOE and to some New contract trend
extent private contracts. We nonetheless anticipate the new Rp tr
contract growth to slow down in the coming months with the 180.0 163.9
three contractors only guiding for a 4% increase in new 160.0
157.4
Page 3
Industry Focus
Government-funded projects that are up for bidding remain Rp76.2tr backlog contracts, of which 21% comes from the
aplenty, but are more prone to delay, especially if the state’s Jakarta-Bandung high-speed railway project (where WIKA has
revenue collection falls short of target. Meanwhile, the an effective stake of 23%). Meanwhile, PTPP has Rp58.1tr
government’s strategy to decentralise its infrastructure budget backlog contracts.
from ministries to regional government also means a smaller
chance for large-scale state-owned contractors, i.e. WIKA, Among the three contractors, PTPP’s order book is more
PTPP and WSKT, to win the projects due to their relatively diverse and least concentrated to a single or one type of
small ticket size, slower execution and tighter competition project. Note that the majority of WKST’s order book are
against regional players. highly leveraged to toll road projects in Java while 21% of
WIKA’s order book is from the Jakarta-Bandung high-speed
New contracts from government-funded projects railway project.
Rp tr
35.0 Contractors’ revenue visibility
30.0 6.1 Rp tr (x)
25.0 100.0 4.0
5.1 3.3
90.0 3.5
20.0 80.0
15.6 2.7 3.0
15.0 9.9 70.0
4.0 60.0 2.5 2.5
10.0
50.0 92.9 2.0
7.9 10.9 40.0
5.0 10.7 76.2 1.5
2.7 30.0 58.1 37.7
- 1.0
20.0
2014A 2015A 2016A 22.8 21.9 0.5
10.0
WIKA WSKT PTPP - -
WIKA PTPP WSKT
Source: Company, AllianceDBS, DBSVI
Outstanding order book* (LHS)
Revenue FY17F (LHS)
Outst. order book/revenue FY17F (RHS)
Contribution of government-funded projects* to total
new contract *As et end of May 2017
Source: Company, AllianceDBS, DBSVI
45% 43%
40%
35% Land acquisition risk – same old story?
35%
31% 30%
30%
25% 22%
24% The three contractors under our coverage recorded a strong
20% 20% 21%
20%
19% new contract growth of 86% y-o-y in FY16. Nonetheless,
15%
15% 19% execution was slower than expected, particularly in 4Q16 with
10% combined revenue of WSKT, WIKA and PTPP (ex-property and
5% toll road operations) in the quarter only growing by 21% y-o-
- y, decelerating from the 40% growth booked in 9M16. The
WIKA WSKT PTPP Total deceleration was mostly due to WIKA and PTPP, whose
2014 2015 2016 revenue ex-property grew by only 6% and 2% y-o-y
respectively.
*Excluding projects funded by SOE
Source: Company, AllianceDBS, DBSVI
Based on our checks, land acquisition issue remained the key
hurdle as most of the contracts awarded in the past 12
Record-high order book to support revenue visibility
months are land-intensive toll road projects. In our view, aside
from technical issues, the project execution to some extent
On the positive side, the three contractors under our coverage
hinges on the disbursement of land acquisition funds. Our
are now sitting on a record-high order book. WSKT is leading
discussions with industry players suggest that land clearing
with Rp92.9tr outstanding order book supported by the
process is typically faster when the funding is ready.
greenfield toll road acquisition spree by its 70%-owned
subsidiary Waskita Toll Road. In second position is WIKA with
Page 4
Industry Focus
Under the 2016 revised state budget and 2017 state budget, especially with fiscal deficit being capped at 3% by law. In
the government allocated Rp16tr and Rp20tr respectively to addition, the government is no longer actively injecting capital
fund land acquisitions for infrastructure projects. As at the into SOEs. Alternative funding such as Private-Public
time of writing, a large part of the budget has yet to be Partnership (PPP) is required to enable the project to take off,
disbursed due to bureaucratic and regulatory hurdles. As a but bureaucratic bottlenecks and complexity of land
result, toll road concession owners are asked to cover for the acquisition issues may push these projects backward. The
land costs to speed up execution. government may also be more active in leveraging on foreign
funding in line with One Belt One Road where the Jakarta-
Land acquisition bailout fund from project owners Bandung High Speed Rail is being financed by the China
Rp tr Development Bank.
25.0 86% 100%
20.2 90% We narrow down our list to a number of transport-based
20.0 80%
16.4 infrastructure projects that in our view are the most plausible
70%
15.0 60% to be executed in the next 12 months based on our checks
43% 50% with contractors and project owners.
35%
10.0 40%
5.4 30%
7.0 7.1
Toll road – Rp80tr potential new contracts in 2017-2019
5.0 20%
4.7 10%
- - The government continues its aggressive rollout of new toll
Jasa Marga* Hutama Karya** Waskita Karya*
road projects although toll roads entering land acquisition or
Total equity (LHS) Bailout fund (LHS) Bailout fund/total equity (RHS) construction phases already far exceed the initial goal of
Source: Company, AllianceDBS, DBSVI 1,000 km. At the end of last year, Indonesia’s leading toll
road operator Jasa Marga (JSMR) announced its plan to
Our discussions with project owners suggest that further expand its toll road network by another 800 km. This
reimbursement will likely take time as the claim must be toll road expansion plan, if realised, will translate to c. Rp80tr
verified by two government agencies, Audit Board (BPK) and worth of new jobs for contractors in 2017-2019.
State’s Asset Management Agency (BLU LMAN). It is also
worth noting that the budget allocation can only cover 57% In our previous sector reports, we had noted that among all
of land acquisition cost estimated by Ministry of Public Work infrastructure projects, toll roads have shown the best
and Housing. Hence, the concession owners will likely progress among all of the government’s infrastructure
continue to pre-finance the shortage to speed up the project initiatives, supported by land acquisition reform, capital
execution. injection to infra-related SOEs and given the less complex
designing and civil work process. Based on our discussion
We have highlighted that more capital is required by with JSMR, a number of new toll roads will be rolled out in
contractors to grow their order books – either to acquire the near future. However, due to JSMR’s hefty funding needs,
some stakes in the infrastructure projects they bid for or to most of the projects will adopt contractor pre-financing (CPF)
work under semi-turnkey or turnkey projects. Given the high scheme (also known as “turnkey”) where contractors will only
capital needs, the disbursement of the land acquisition receive the payment once the toll road construction is entirely
budget will help to ease the cash flow burden of the project completed. We see a risk that these projects would command
owners and allow them and the contractors to execute more a lower profit margin compared to non-CPF toll road projects
projects. won in the past due to the higher working capital
requirement.
Projects up for bidding
Port – eyes on Patimban project
In our past report (Indonesia Construction: Bridging ASEAN
connectivity gap through port build-out), we listed down a Port projects, on the other hand, have moved slower than our
number of transport-based infrastructure projects in the expectation. Two key issues are funding and the higher
government’s pipeline. Job opportunities remain aplenty for complexity of the projects, particularly on the design. Two
contractors given Indonesia’s massive need for infrastructure port projects are currently in the tender process with one of
upgrade. We however note that funding remains a challenge them being the mega Patimban port project in West Java
Page 5
Industry Focus
worth US$3bn (c. Rp40tr). Japan will likely finance most of On the subsequent page, we present our new contract
the projects with the loan deal expected to be signed this estimates after taking into account the contribution from the
year. Based on our channel check, local contractors can win at central government’s annual capex spending.
least 40% of the total contract value, or approximately
Rp16tr, while the remaining will likely be awarded to foreign New contracts – what can surprise on the upside? For power
contractors, depending on the loan term. plant projects, competition is tighter as state-owned
contractors also compete with private players, both from local
In a recent Belt and Road Forum in Beijing, there are also two and foreign countries. As at end of December 2016, only
port projects offered to China for financing, namely Kuala power plants with total capacity of 14.6 GW were still in the
Tanjung port and Bitung port. The projects will comprise initial phase (planning and procurement). Assuming US$1.5m
several phases. Both ports are estimated to cost Rp34tr each. investment per megawatt, this would translate to potential
new contracts of Rp291.9tr. However, a big chunk of the
High-speed and urban railway – some changes to the initial investment is related to EPC while for the civil works, the size
plans is typically less than 30% of the total investment. Given the
high complexity of power plant projects and intense
The likelihood of government expanding the planned Jakarta- competition from more experienced foreign EPC players, we
Bandung high-speed railway network to Surabaya appears to only take into account the civil works with 50% winning rate
be lower now. Instead, it is mulling over revitalising the for the three contractors. An increase in winning rate is
existing railway by building an elevated track. Nevertheless, possible if the contractors actively participate as an equity
the potential new order book from this railway revitalisation investor in the power plant projects.
project would still be sizeable at Rp80tr.
Progress of 35 GW programme (as at end of 2016)
The plan to build an LRT in Bandung was also called off. Operational,
Based on our checks, the project will likely be replaced by 707 Start
metro capsule which has a lower investment cost (c. Rp1tr).
Planning,
Meanwhile, there has been a discussion on LRT development 5,824
in Surabaya. A feasibility study for the project is currently
Construction,
taking place, however the contract size is estimated to only 10,291
reach Rp3.8tr. Another urban railway project scheduled to Procurement,
8,810
start this year is MRT phase 2. The MRT track will be entirely
Power
underground and span 14 km from Hotel Indonesia Purchase
Roundabout to Ancol. The project is estimated to cost at least Agreement,
10,063
Rp22.5tr. Note that WIKA has constructed 15% of the
underground portion for the current Jakarta MRT line and
should be a front runner for this portion. Source: PLN
Page 6
Industry Focus
Potential new contracts from 35 GW programme We also note that there are a number of refinery projects with
Ca p a c i ty (M W) estimated total investment of Rp596tr listed as the
Planning 5,824 government’s priority projects. These projects are overseen by
Procurement 8,810 a special committee called KPPIP (Committee for Acceleration
To ta l 1 4 ,6 3 4 of Priority Infrastructure Delivery which reports directly to
President. We have yet to include the potential contracts from
Ke y a s s u mp ti o n s : these projects while awaiting more clarity on the project
Investment (USD/mn) 1.50 funding. Recently, Pertamina announced its plan to delay the
Civil work portion 25% project completion to after 2020 due to financing issues.
USDIDR 13,300
Potential new contract (Rp bn) 72,987 Given the high complexity of the refinery projects, we think
Big 3 state-owned contractors' winning rate 50% only a small part of the contract size can be awarded to the
Po te n ti a l n e w c o n tra c t fo r b i g 3 s ta te -o wn e d
listed state-owned contractors. If this projects go through, we
c o n tra c to rs (R p b n ) 3 6 ,4 9 4 believe the contract can provide potential upside to WIKA,
Co n tra c t a wa rd e d p e r a n n u m a s s u mi n g : which has better experience in refinery projects compared to
3 years contract award (Rp bn) 12,165 PTPP and WSKT.
2 years contract award (Rp bn) 18,247
Source: PLN, AllianceDBS, DBSVI
WI KA, WSKT a n d PTPP's ma rke t s h a re * 11% 12% 20% 20% 20% 20%
* New contracts of WIKA+WSKT+PTPP / gov't capex spending
Source: Company, AllianceDBS, DBSVI
Page 7
Industry Focus
Toll road
Jasa Marga's toll road expansion plan Indonesia 80,000
Railway
Bandung-Surabaya railway revitalisation West Java, East Java 80,000
Bandung Metro Capsule West Java 1,000
Surabaya LRT East Java 3,800
Jakarta MRT Phase 2* Jakarta 3,375
Port
Patimban Port Stage 1 Phase 1* West Java 7,052
Kuala Tanjung Port Phase 2* North Sumatra 3,200
Power
2018F Indonesia 18,247
Government-funded projects
2018F state budget Indonesia 33,281
Total 229,955
2018F new contract assuming two years of contract award 149,955
New contracts
FY15A 84,380
FY16A 157,337
FY17F 159,787
FY18F 149,955
Page 8
Industry Focus
Page 9
Industry Focus
Consensus is expecting 47% y-o-y revenue growth in FY17 for Construction sector’s 12-month forward PE
the big three state-owned contractors with net profit growing 30
slower at 33% y-o-y. As a comparison, the big three state-
owned contractors booked 34% y-o-y revenue growth and 25 +2sd
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
financing needs. The magnitude of net margin decline in 2017
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
based on consensus expectation is the largest on WSKT,
followed by WIKA. Source: Bloomberg Finance L.P, AllianceDBS, DBSVI
Consensus’ 2017 net profit revision Construction sector’s 12-month forward PE relative to JCI
35% 30 40%
28% 30%
30% 27%
25 20%
25%
10%
20% 16% 20 0%
15%
15% -10%
15 -20%
10%
6% -30%
5% 0% 3%
1% 1% 10 -40%
-1%
0% -50%
WSKT WIKA -0.2% PTPP WTON
-5% 5 -60%
-3%
Oct-12
Oct-13
Oct-14
Oct-15
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
-10% -6%
Past 12 months YTD Post FY16 audited results Post 1Q17 results
Construction PE premium to JCI (RHS) Construction PE
Source: Bloomberg Finance L.P JCI PE Avg. construction PE premium to JCI (RHS)
Page 10
Industry Focus
book, lower than WSKT at 0.61x. It is also worth noting that Where we differ
PTPP has a smaller capex commitment compared to WSKT, and
a relatively less leveraged balance sheet to support its future We are less bullish on the sector compared to the street,
earnings and new contract growth. We forecast PTPP’s net particularly on WIKA and WSKT. The consensus Buy call on all
profit to grow at a CAGR of 27% in 2016A-2018F. listed state-owned contractors (refer to the table below)
suggests that a broad-based execution improvement is expected
While WIKA’s EV/order book multiple is on par with PTPP, it is to lift the share prices of all state-owned contractors. On the
now trading at 17.5x 17F PE (vs. PTPP at 15.4x 17F PE). Given contrary, given the peaking new contract growth and differing
the higher PE multiple and downside risk on earnings, we prefer risk profile among the contractors, we believe selective investing
to wait for the Jakarta-Bandung HSR progress to accelerate in the sector is the best approach.
before turning more positive on the stock.
DBS vs. consensus’ recommendation
As work on the projects commence, WTON is in a sweet spot as No . o f Co n s e n s u s ' re c o mme n d a ti o n DB S'
it starts to receive new orders from contractors/project owners. a n a l ys t B UY HO LD SELL re c o mme n d a ti o n
We view WTON as a good proxy to the infrastructure sector WIKA 32 25 7 0 HOLD
given its strong presence across Indonesia. PTPP 29 29 0 0 BUY
WSKT 29 25 4 0 HOLD
WTON 16 14 1 1 BUY
EV/order book Source: AllianceDBS, DBSVI, Bloomberg Finance L.P.
Rp tr (x)
100.0
0.61
0.70 Our FY17 net profit forecasts for WIKA and WSKT are one of
0.60 the lowest on the street. We have a HOLD call among consensus
80.0
0.41 0.50 Buy calls on both companies.
60.0 0.40
0.34 56.8 WIKA. WIKA’s FY17 net profit largely depends on the
0.26 0.30
40.0
0.20
construction progress of Jakarta-Bandung high-speed railway.
20.0 Assuming 6.3% net margin and 37% progress for FY17, the
20.0 19.9 0.10
76.2 58.1 92.9 project (ex-precast) should contribute Rp183bn net profit to
- -
WIKA PTPP WSKT Avg. WIKA or 30% of management’s net profit target for FY17. We
Outstanding order book* (LHS) EV** (LHS) EV/outst. order book* (RHS)
see downside risk on WIKA’s net profit given that the
construction work is expected to resume only in July 2017.
*As at end of March 2017; ** As of 5 July 2017
Source: Company, AllianceDBS, DBSVI Our FY17 net profit forecast for WIKA is 9% lower than
consensus as we expect higher capital requirement and debt to
Gross and net gearing* support its new contract and earnings growth.
1.40 1.28
1.20 WSKT. Our net profit forecasts for WSKT are 9%/27% lower
1.00 relative to consensus as we have factored in potential start-up
0.83
0.80
losses from its toll road business.
0.60 0.54
0.47
0.32 Summary of net profit forecast changes
0.40 0.25 F Y 17F net prof it F Y 18F net prof it
0.20
-0.08 -0.16 O ld New Change Old New Change
0.00
WSKT 1,824 2,168 19% 1,745 2,209 27%
-0.20 WIKA PTPP WSKT WTON
WIKA 1,111 1,140 3% 1,530 1,595 4%
-0.40
PTPP 1,331 1,341 1% 1,645 1,644 0%
Gross gearing Net gearing WTON 366 366 0% 418 418 0%
A ggregat e 4,632 5,016 8% 5,338 5,865 10%
*As at end of March 2017
Source: Company, AllianceDBS, DBSVI Source: AllianceDBS, DBSVI
Page 11
Industry Focus
0.80 0.73
0.60 FY17F
FY18F
0.40
0.20
-
WSKT WIKA PTPP WTON
Key risks
Page 12
Industry Focus
Valuation summary
M a rk e t D ilut e d EV/
C ap P ric e R ec. TP P E ( x) P / B ( x) E B IT D A ( x) R OA E EP S C A GR EV/ N et
o rde r G e a ring
( ID R bn) ( ID R ) F Y 17 F Y 18 F Y 17 F Y 18 F Y 17 F Y 18 F Y 17 F Y 18 F Y 16 A - 18 F bo o k ** ( x)
Wijaya Karya 19,913 2,270 HOLD 2,050 17.5 12.5 1.6 1.5 9.1 7.4 10% 12% 6% 0.26 Net Cash
P T P P (P ersero ) 20,646 3,330 B UY 4,100 15.4 12.6 1.9 1.7 8.6 7.4 13% 14% 12% 0.34 Net Cash
Waskita Karya 30,813 2,270 HOLD 2,400 14.2 13.9 2.4 2.1 13.0 12.4 18% 16% 14% 0.61 0.83
A dhi Karya* 7,763 2,180 N/R N/A 12.8 8.8 1.3 1.1
Wijaya Karya B eto n 5,273 605 B UY 760 14.4 12.6 1.9 1.7 8.4 7.4 14% 15% 24% 1.07 0.25
We ight e d a v e ra ge 15 .1 12 .7 2 .0 1.7 9 .5 8 .6 13 % 13 %
Page 13
Industry Focus
Company Guides
Page 14
Indonesia Company Guide
Waskita Karya
Version 6 | Bloomberg: WSKT IJ | Reuters: WSKT.JK Refer to important disclosures at the end of this report
WHAT’S NEW
Order book at record high, boosting its revenue visibility to because of its smaller geographical presence, less extensive
2.5 years. We estimate WSKT’s outstanding order book stood product range and narrower clientele. Lastly, we value
at Rp92.9tr as at end of May 2017 after winning Rp14.9tr WSKT’s toll road concessions using DCF. We apply 10%
worth of new contracts in 5M17. WSKT’s sizeable backlog WACC and 0% long-term growth as we run our DCF until
which mainly comprises of Trans Java toll roads and the end of the concession period. Note that we have yet to
Palembang LRT offers revenue visibility for 2.5 years. take into account WSKT’s five newly acquired toll roads into
our calculation i.e. Kuala Tanjung – Tebing Tinggi – Parapat
Revised up new contract assumptions and earnings. Due to
(143 km), Cileunyi – Sumedang – Dawuan (60 km), Cibitung
the strong new contract flows in 4Q17, we raised our FY17F
– Cilincing (35 km), Krian – Legundi – Blunder – Manyar (38
new contract assumption to Rp78tr (from Rp40tr previously).
km) and Kaya Agung – Palembang – Betung (112 km), as we
With a higher order book, we revised up our FY17F/FY18F net
await more details on these concessions.
profit by 19%/27%. Despite the upward revision, our
earnings forecast for FY17F/FY18F are 8%/27% below Looking beyond this year’s strong earnings outlook. We
consensus as we have factored in potential start-up losses maintain our Hold call on WSKT. We think the stock is fairly
from WSKT’s toll road business. valued at current price, trading at 14.2x 17F PE with net
profit CAGR of 14% in 2016-2018F. Despite the strong
Cutting TP to Rp2,400. We updated our sum of parts (SOP)
earnings growth outlook this year (we forecast 27% net
valuation, resulting in a lower TP of Rp2,400, from Rp2,950
profit growth in FY17F), we reserve our concern over the
previously. We value WSKT’s ex-precast and toll road business
company’s cash flow generation and its high capex
at 10x PE 17F (1.5SD below sector’s historical mean). Our PE
commitment to fund its toll road concessions. We believe
multiple is at discount to sector’s historical mean PE given the
hefty funding is needed to keep growing its order book and
nature of WSKT’s business where the big chunk of the
earnings at the current pace. Further divestment of its toll
construction earnings can only be converted to cash upon the
road concession at a favourable price is key catalyst for the
divestment of its toll road concession.
stock.
We pegged Waskita’s precast business, WSBP, at 15x PE
FY17F, a 20% discount to our target multiple for Wijaya
Karya Beton (WTON). We think the discount is justified
Operating cash flow and capex trend and forecasts Gearing trend and forecasts
Rp bn (x)
20,000 2.50
2.05 2.10
13,983
15,000 2.00 1.84
10,661 1.68
1.50
10,000 7,086 1.50
6,261
1.14
5,000 0.87
1,210 658 1.00 0.83
(89) 0.54
0
2014A 2015A 2016A 2017F 2018F 0.50 0.26
(5,000) (1,747)
(3,201)
-
(10,000) (7,762) 2014A 2015A 2016A 2017F 2018F
Operating cash flow Capex Net gearing Gross gearing
Earnings revision
2017F 2018F
Old New % change Old New % change
Revenue 32,055 37,666 18% 37,900 49,997 32%
Gross profit 4,687 6,111 30% 5,381 7,699 43%
EBIT 3,767 4,932 31% 4,281 6,141 43%
Net Profit 1,824 2,168 19% 1,745 2,209 27%
New contracts (Rp bn) 40,000 78,000 95% 25,000 67,939 172%
Cum. order book (Rp bn) 116,219 155,514 34% 114,361 184,788 62%
Net interest exp. 641 1,245 94% 783 2,029 159%
Critical Factors
New wins from government or external parties. The award of Source: Company, AllianceDBS, DBSVI
new contracts had been a key positive driver of WSKT’s share
price. This was evident where the strong growth in new
contracts in 2015-2016 drove the shares’ outperformance in the
same period. However, we think the concern over the
sustainability of its new contract wins has outweighed the
excitement over its recent new contract wins, especially since
most of the growth in its order book has been driven by its
internal toll road projects instead of the government or external
projects. Note that internal toll road projects are riskier in nature
as the profit would only fully translate into cash upon the
divestment of the concessions – a process that would likely take
additional time. This has caused WSKT’s share price to
underperform the market despite the company’s relatively
strong new contract and earnings growth (refer to Appendix 1)
in the past few months.
Appendix 1:
A look at the company's listed history – what drives its share price?
2,500
C 2.0
2,000 B
1.5
A D
1,500
1.0
1,000
0.5
500
0 -
Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16
*Based on the average return of the listed state-owned contractors
Source: Company, AllianceDBS, DBSVI
- -50%
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Sep-13
Sep-14
Sep-15
Sep-16
Jun-13
Jun-14
Jun-15
Jun-16
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
WSKT’s share price vs. Rupiah
900 16,000
800 15,000 WSKT share price (LHS) T12M new contract growth y-o-y (RHS)
700 14,000
600 Source: Company, AllianceDBS, DBSVI, Bloomberg Finance L.P.
13,000
500
12,000
400
300
11,000 C: Earnings momentum
200 10,000
The company delivered strong earnings in 1H16, fueled by
100 9,000
0 8,000
enlarged capital post rights issue. In addition, strong earnings
momentum (with consensus upgrading earnings forecasts by
43% in the same period) led to a rally in its share price.
WSKT share price (LHS) USDIDR (RHS)
Source: Bloomberg Finance L.P. WSKT’s share price vs. consensus’ earnings forecasts
3,000 190
2,800
B: Share price moved in line with new contract growth 2,600
170
150
WSKT’s new contracts grew strongly by 70% y-o-y in FY16, 2,400
2,200 130
outperforming its peers, PT PP (PTPP) and Wijaya Karya (WIKA), 2,000
110
1,800
whose new contracts were flat y-o-y. 1,600 90
1,400
70
1,200
1,000 50
WSKT share price (LHS) Consensus EPS 16F (RHS) Consensus EPS 17F (RHS)
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16
Sector performance relative to JCI WSKT's share price return relative to JCI
WSKT’s share price return relative to JCI vs. free cash flow
Rp bn
7.0 10,000
6.0 5,000
5.0
0
4.0
(5,000)
3.0
(10,000)
2.0
1.0 (15,000)
- (20,000)
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Company Background
PT Waskita Karya Tbk (WSKT) is a state-owned contractor
engaged in a wide variety of construction activities including
toll roads, bridges, ports and buildings. It is the most leveraged
proxy to the Indonesian construction sector, deriving c. 95% of
its revenues from construction.
PB Band (x)
Key Assumptions
FY Dec 2014A 2015A 2016A 2017F 2018F
New Contract (Rp bn) 22,625 32,084 69,974 78,000 67,940
Carry Over Contr. (Rp bn) 10,516 19,746 34,049 77,514 116,849
Construction GPM (%) 10.1 13.0 16.1 15.0 14.0
Precast Gross Margin (%) 18.2 15.9 22.2 20.0 19.0
Toll road start-up losses (287) (1,282)
Segmental Breakdown
FY Dec 2014A 2015A 2016A 2017F 2018F
Revenues (Rpbn)
Construction 9,484 12,052 22,373 30,120 40,340
Building rentals/Property 0.30 0.60 46.8 46.8 46.8
Precast 803 2,069 1,149 7,219 8,862
Energy 0.0 0.0 1.80 0.0 0.0 Revenue contribution
Others 0.0 31.8 218 280 748 from toll road operation
Total 10,287 14,153 23,788 37,666 49,997 business.
Gross Profit (Rpbn)
Construction 963 1,561 3,591 4,518 5,648
Building rentals/Property 0.30 0.60 17.7 17.7 17.7
Precast 146 328 255 1,444 1,684
Energy 0.0 0.0 1.70 0.0 0.0
Others 0.0 0.0 102 131 350
Total 1,109 1,889 3,968 6,111 7,699
Gross Profit Margins (%)
Construction 10.1 13.0 16.1 15.0 14.0
Building rentals/Property 99.7 100.0 37.9 37.9 37.9
Precast 18.2 15.9 22.2 20.0 19.0
Energy N/A N/A 94.9 N/A N/A
Others N/A 0.0 46.8 46.8 46.8
Total 10.8 13.4 16.7 16.2 15.4
Growth
Revenue Gth (%) (54.4) 63.2 18.2 65.1 (27.0)
EBITDA Gth (%) (65.0) 101.3 0.7 40.5 (21.1)
Opg Profit Gth (%) (26.1) 43.1 (0.4) 35.0 (11.0)
Net Profit Gth (Pre-ex) (%) (78.0) 260.5 (24.1) 123.6 (47.8)
Margins
Gross Margins (%) 16.9 19.3 15.8 15.8 14.5
Opg Profit Margins (%) 18.8 16.5 13.9 11.4 13.8
Net Profit Margins (%) 4.1 9.2 5.9 8.0 5.7
Critical Factors
Maintaining positive new contract growth momentum post rights
issue. PTPP successfully raised Rp4.4tr cash through a rights issue in
December 2016. It intends to use 76% of the proceeds to fund
equity investments in infrastructure projects, among which are
Kuala Tanjung Multi-Purpose Terminal and Industrial Estate, five toll
roads (such as Balikpapan-Samarinda toll road, Manado-Bitung toll
road, Pandaan-Malang toll road), a 2x200MW power plant in
Sumatra, and low-cost apartments, while the remaining 24% will
be used for working capital. With ample cash post rights issue, the Carry Over Contract (Rp bn)
company should be able to take on more projects in FY17. This
year, the company is eyeing new contracts worth Rp40.6tr,
representing 25% increase y-o-y.
Redirecting focus to government-related infrastructure projects. We PTPP's new contracts (Rp bn) as % of FY17 target
Appendix 1: A look at the company's listed history – what drives its share price?
0 -
Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16
A: Rupiah depreciation C: Higher exposure to power plant projects and awards of big
PTPP’s share price along with the other state-owned ticket infrastructure projects
contractors were under pressure due to concerns over cost Earnings recovery in 2Q16 was strong with core profit surging
overruns, particularly related to government’s infrastructure by 260% y-o-y, mainly driven by EPC business (power plant
projects. A portion of raw materials are imported, hence construction). Furthermore, the management shared its plan to
Rupiah depreciation may impact margins and earnings expand its higher margin EPC business. PTPP’s share price re-
negatively. However, PTPP has been least affected compared rated upwards following the award of two mega toll road
to other state-owned contractors due to its lower exposure to projects in June 2016.
government infrastructure projects in the past.
PTPP’s share price vs. new contract
PTPP’s share price vs. USDIDR
5,000 40,000
5,000 16,000 35,000
15,000 4,000 30,000
4,000
14,000 3,000 25,000
13,000 20,000
3,000 2,000
12,000 15,000
2,000 1,000 10,000
11,000
5,000
10,000
1,000 - 0
9,000
Sep-13
Sep-14
Sep-15
Sep-16
Jun-13
Jun-14
Jun-15
Jun-16
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
- 8,000
Dec-12
Dec-13
Dec-14
Dec-15
Sep-13
Sep-14
Sep-15
Mar-13
Jun-13
Mar-14
Jun-14
Mar-15
Jun-15
Mar-16
Jun-16
Key Risks:
Slowdown in property sector. PTPP’s exposure to the property
sector has increased notably with net profit contribution from
the property arm at 23% in FY16. We estimate that 15%-20%
of PTPP’s outstanding order book are contracts from private
developers. A prolonged slowdown in the property market
may pose risks to PTPP’s earnings and cash flows.
Company Background
PTPP is Indonesia's leading construction company with a
portfolio ranging from building engineering to infrastructure
construction projects. It has established a solid reputation in
the construction of high-rise buildings and ports.
PB Band (x)
Key Assumptions
FY Dec 2014A 2015A 2016A 2017F 2018F
New Contract Win (Rp bn) 20,240 27,074 32,600 38,760 44,244
Carry Over Contract (Rp 22,278 29,867 39,600 48,400 48,861
Segmental Breakdown
FY Dec 2014A 2015A 2016A 2017F 2018F
Revenues (Rpbn)
Construction 10,662 11,611 11,815 11,174 11,275
Real Estate and Property 645 1,573 2,180 2,258 2,845
EPC 1,091 928 2,366 5,264 8,644
Others 29.3 106 97.9 3,215 4,114
Total 12,427 14,217 16,459 21,911 26,878
Gross Profit (Rpbn)
Construction 1,414 1,244 1,422 1,229 1,240
Real Estate and Property 267 680 1,175 1,135 1,431
EPC 143 206 377 684 1,124
Others (91.8) (124) (518) 355 480
Total 1,732 2,007 2,456 3,404 4,275
Gross Profit Margins (%)
Construction 13.3 10.7 12.0 11.0 11.0
Real Estate and Property 41.3 43.3 53.9 50.3 50.3
EPC 13.1 22.2 15.9 13.0 13.0
Others (313.1) (117.1) (529.0) 11.0 11.7
Total 13.9 14.1 14.9 15.5 15.9
Growth
Revenue Gth (%) (52.5) 50.1 12.6 28.3 (48.0)
EBITDA Gth (%) (67.9) 93.8 (4.0) 85.7 (65.3)
Opg Profit Gth (%) (63.8) 67.5 13.1 65.7 (70.6)
Net Profit Gth (Pre-ex) (%) (72.9) 162.0 (17.8) 115.9 (71.5)
Margins
Gross Margins (%) 13.9 14.1 13.9 16.8 13.4
Opg Profit Margins (%) 9.9 11.0 11.1 14.3 8.1
Net Profit Margins (%) 3.8 6.6 4.8 8.1 4.5
WHAT’S NEW
Critical Factors
how the consortium plans to compensate for HSR’s low IRR 20.0 40%
35%
(estimated FIRR is in the range of 6.5%-10.8%). The HSR 27%
15.0 30%
consortium plans to team up with private developers given the high 25%
capital requirement to develop new townships. Nonetheless, we 10.0 20%
believe WIKA Realty, WIKA’s property arm, would play an 13%
15%
important role in the development. 5.0 10%
5%
5.6 11.8 16.6 18.2 20.0
- -
Government’s tax collection. 20%-40% of WIKA’s annual new 1M17 2M17 3M17 4M17 5M17
contracts for the period 2012-2016 were infrastructure projects
New contract, Rp tr (LHS) as % of FY17F (RHS)
funded by the government. Slow tax collection may lead to fiscal
budget shortfalls and some delay in government’s projects. This New Contract Based on Project Owner
may results in lower-than-expected contract wins and earnings for Rp tr
WIKA. 60.0
50.0
40.0
43.4 Ex-Gov't
30.0 Gov't
20.0
14.5
10.0 14.5 14.9
10.8 11.4
- 3.3 2.7
2013 2014 2015 2016
Appendix 1: A look at Company's listed history – what drives its share price?
3,500
1.0
B
3,000
0.8
2,500
2,000 0.6
1,500 A2 0.4
1,000
A1 0.2
500
0 -
Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16
500
4,000 80,000
0
3,500 70,000 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16
3,000 60,000 Source: Company, AllianceDBS, DBSVI
2,500 50,000
2,000 40,000
1,500 30,000
1,000 20,000
500 10,000
0 0
Sep-13
Sep-14
Sep-15
Sep-16
Jun-13
Jun-14
Jun-15
Jun-16
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
raise Rp1tr. WIKA also plans to list its property business, WIKA
Realty, in 2017.
Key Risks:
Delay in infrastructure project execution. Any delay in project
execution could lead to lower order book and earnings. Such
newsflow could also create negative sentiment towards
Indonesia's construction sector and lead to valuation de-rating.
Lower free cashflow generation in the medium term. Aside Forward PE Band (x)
from being the contractor, WIKA typically owns some stakes in
the assets being built. This exposes WIKA to the risk of
deteriorating cashflow generation, as such a business model
requires high capital investments and normally generates
negative cashflows in the early years of operations.
Company Background
Wijaya Karya is a construction company with interests in EPC,
civil, building works, precast and realty.
PB Band (x)
Key Assumptions
FY Dec 2014A 2015A 2016A 2017F 2018F
New Contract Win (Rp bn) 17,632 25,222 54,764 43,027 37,771
Contract Backlog (Rp bn) 23,784 23,302 28,526 59,329 73,817
Segmental Breakdown
FY Dec 2014A 2015A 2016A 2017F 2018F
Revenues (Rpbn)
Construction 4,731 5,984 7,476 15,014 26,492
EPC 3,179 3,370 2,875 2,058 3,440
Industrial (Precast) 3,271 2,830 3,292 4,743 5,551
Property 1,283 1,436 2,026 1,029 1,643
Total 12,463 13,620 15,669 22,844 37,126
Gross Profit (Rpbn) We assume HSR
Construction 371 593 878 1,763 2,995 construction would
EPC 273 424 341 247 413 contribute 32% and
Industrial (Precast) 544 400 532 686 790 33% to WIKA’s FY17F
Property 237 238 476 165 263 and FY18F revenue
respectively.
Total 1,425 1,655 2,227 2,860 4,461
Gross Profit Margins (%)
Construction 7.8 9.9 11.7 11.7 11.3
EPC 8.6 12.6 11.9 12.0 12.0
Industrial (Precast) 16.6 14.1 16.2 14.5 14.2
Property 18.4 16.6 23.5 16.0 16.0
Total 11.4 12.1 14.2 12.5 12.0
Growth
Revenue Gth (%) (50.7) 21.3 0.0 91.5 (39.8)
EBITDA Gth (%) (46.7) 24.8 (10.0) 144.4 (45.5)
Opg Profit Gth (%) (61.7) 45.5 (6.0) 227.1 (67.9)
Net Profit Gth (Pre-ex) (%) (69.4) 157.9 (21.6) 320.9 (59.8)
Margins
Gross Margins (%) 10.7 13.3 11.7 17.5 10.8
Opg Profit Margins (%) 7.5 9.0 8.5 14.5 7.7
Net Profit Margins (%) 2.6 5.6 4.4 9.6 6.4
WHAT’S NEW
Building competitive edge by offering one-stop service. WTON 1Q17, leading to a delay in precast concrete installment and
targets to increase revenue contribution from precast concrete revenue recognition for WTON in the same period.
installation service from 4% in FY16 to 25% over the next five
years. The company plans to offer a one stop service to South Lampung factory. WTON recently commissioned its new
customers, from precast production to installation, to factory in South Lampung. The factory location enables the
strengthen its competitive position in the market. Our checks company to transport precast concrete via sea freight, which is
with management suggests that this one-stop package typically generally cheaper compared to land transport. Based on our
commands higher margins compared to regular sales. discussions with management, ASPs for precast sourced from
However, this may delay the revenue recognition and hence the South Lampung factory to Balikpapan (East Kalimantan) is
stretch WTON’s inventory days. We note that for regular sales, 3-6% lower compared to those sourced from the West Java
revenue is typically recorded once the precast concrete is factory. With this strategically located factory, we believe
shipped, whereas for one-stop package, revenue is recorded WTON will be able to benefit from the government’s push to
only when the precast concrete is installed at the project decentralise infrastructure development to areas outside Java.
owner’s site. A case in point was the Medan-Kuala Namu
railway project. The project faced some technical issues in
Critical Factors
Clear beneficiary of Jakarta-Bandung HSR. The Jakarta-Bandung
high-speed railway (HSR) project is estimated to require 3-3.5m
tons of precast concrete in 2017-2019 with a contract value of
Rp6tr – Rp9tr. WTON expects to win at least Rp2tr – Rp3tr of the
total contract size. The company plans to set up several temporary
production facilities near HSR’s construction site to cater to this
large order. In addition, the HSR consortium also plans to build a
Transit Oriented Development (TOD) in the vicinity of HSR’s four Production capacity ('000 tons)
stations. We expect the HSR project to contribute 13%/22% to our
FY17/FY18 revenue and EBIT forecasts.
Appendix 1: A look at the company's listed history – what drives its share price?
1,600 B 2.00
1,400 C1 C2
A 1.80
1,200 D 1.60
1,000
1.40
800
1.20
600
400 1.00
200 0.80
- 0.60
A: Strong pricing power WTON share price vs. revenue from state-owned
WTON’s share price rally post IPO in April 2014 was driven by contractors
its strong earnings growth. WTON had a strong competitive 1,600 500
position with market share of 38.6% in 2013, while the 1,400 450
second largest player only commanded 15.9% market share. 1,200 400
This allows the company to enjoy strong pricing power and 1,000 350
margin expansion. 800 300
600 250
400 200
B: Intensifying competition 200 150
Slower than expected rollout of government’s infrastructure - 100
projects along with intensifying competition, especially among Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16
state-owned precast producers, caused WTON’s share price to
WTON share price (LHS) Revenue from SOE contractors, Rp bn (RHS)
de-rate in 2015. In FY15, WTON saw its revenue declining by
19% on the combination of declining ASP and revenue Source: Company, AllianceDBS, DBSVI
contribution from state-owned contractors. State-owned
contractors such as Waskita Karya, Hutama Karya and PTPP C: Jakarta-Bandung high-speed railway (HSR)
started to expand precast production capacity and opted to Despite the declining order book from state-owned contractors,
source their precast requirements internally. This caused the appointment of its parent company, WIKA, as one of the
revenue contribution from state-owned contractors to decline main contractors for the mega project Jakarta-Bandung HSR is
by 43% y-o-y in FY15 with contribution to WTON’s positive for WTON. Initially, the management indicated a
consolidated sales shrinking from 13% to 9%. Meanwhile, we potential contract worth Rp6tr – Rp9tr from the mega project.
reckon intense competition resulted in WTON lowering its This positive news caused WTON’s share price to rally following
selling price to maintain market share. The following chart the ground breaking of the project in early 2016 (C1). However,
shows the correlation between WTON’s share price and after a prolonged series of negotiations with China, the
revenue contribution from state-owned contractors. management guided that it would likely get a significantly lower
contract target of Rp2tr – Rp3tr as it was unable to meet some
of the product specifications. This along with the delay in HSR
construction caused the share price to de-rate (C2).
D: Delay in project execution
Delay in execution of infrastructure project caused WTON’s
revenue to fall short of market expectations. In 1Q17, WTON’s
revenue was flat y-o-y while net profit grew a marginal 2%
despite its large contract backlog.
Key Risks:
Delay in government’s infrastructure project rollout,
particularly for the Jakarta-Bandung HSR, would result in
lower-than-expected order book and profit for WTON.
Delays in infrastructure project execution will cause WTON’s
revenue to fall short of expectations, and also lower WTON’s
profitability given its high operating leverage.
Forward PE Band (x)
Increasing competition in the Java market. Major SOE
contractors are looking to increase their precast production
capacities, particularly in the Java market. Intensifying
competition may weaken WTON’s pricing power in Java and
erode its margins. In FY16, Java contributed 56% and 38% of
WTON’s consolidated revenue and earnings respectively.
Company Background
WTON is the dominant market leader in precast concrete with
over 30% market share.
Key Assumptions
FY Dec 2014A 2015A 2016A 2017F 2018F
Gross margin (%) 14.9 12.4 14.5 14.5 14.2
Production capacity ('000 2,200 2,300 2,500 3,000 3,300
Sales volume ('000 tons) 1,464 1,413 1,520 2,074 2,427
Utilisation rate (%) 66.5 61.4 60.8 69.1 73.6
Segmental Breakdown
FY Dec 2014A 2015A 2016A 2017F 2018F
Revenues (Rpbn)
Concrete 3,228 2,591 3,349 4,569 5,348
Service 49.7 61.7 133 174 203
Total 3,277 2,653 3,482 4,743 5,551
Operating Profit (Rpbn)
Concrete 396 231 392 534 613
Service 12.7 7.40 15.9 20.8 24.4
Total 409 238 408 555 637
Operating Profit Margins
Concrete 12.3 8.9 11.7 11.7 11.5
Service 25.5 12.0 12.0 12.0 12.0
Total 12.5 9.0 11.7 11.7 11.5
Growth
Revenue Gth (%) 67.9 (33.6) 7.3 (8.0) 71.5
EBITDA Gth (%) 101.9 (32.0) 17.0 (2.6) 75.9
Opg Profit Gth (%) 105.2 (33.5) 17.8 (4.1) 101.0
Net Profit Gth (Pre-ex) (%) 151.7 (41.7) 17.7 (6.9) 96.2
Margins
Gross Margins (%) 12.7 12.4 13.9 14.5 16.0
Opg Profit Margins (%) 10.0 10.0 11.0 11.4 13.4
Net Profit Margins (%) 7.8 6.9 7.5 7.6 8.7
AllianceDBS, DBSVI recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Sources for all charts and tables are AllianceDBS, DBSVI unless otherwise specified.
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This report is prepared by AllianceDBS Research Sdn Bhd (''AllianceDBS''), PT DBS Vickers Sekuritas Indonesia (''DBSVI''). This report is solely
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Page 48
Industry Focus
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1
An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child
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Page 49
Industry Focus
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Industry Focus
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