indonesia construction 1-feb-2016 id - dbs group pembangunan 3,900 1,382 4,650 2.4 2.6 buy wijaya...

ed-JS / sa- MA

Delivering on delayed growth

Government is better prepared to award projects this year; job flow improvement on the cards

Contractors raising capex to support growth; SOE consolidation to follow

Valuation has now corrected to a more reasonable level

Top picks are PTPP (BUY) and WSKT (Upgrade to BUY)

A perfect time for an infrastructure push. The slowing economy is increasing the urgency for the government to pump prime the economy via higher infrastructure spending. Unlike last year where transitional issues impeded project awards and project execution, Joko Widodo’s administration is better prepared in its second year of office. Positive initiatives of late have been early auction and 2016 budget prefunding.

Expanding role of state-owned contractors. We have observed a trend where state-run contractors expand their role by increasing equity investments on infrastructure assets. While this route typically comes with start up losses, long gestation period of investments and project risks, the contractors will be able to secure a recurring income stream in the future.

SOE consolidation− the next big catalyst. More clarity on the SOE consolidation plan may be the next big catalyst for the sector. The first test will be the acquisition of ADHI by WSKT which is slated to kick off this year. While it is too early to assess the potential earnings dilution/accretion due to lack of details provided, the move should be positive in the longer term given the current fragmented structure of the sector and intensifying competition among state-run contractors of late.

Valuations off peak levels, potential re-rating. The sector is now trading at 21x PE (+0.8SD above historical mean) vs. the peak of 27x in Feb 2015. In our view, part of the de-rating from the peak reflects the choppy execution of the state budget and disappointing earnings for some companies. We think there is room for the sector to trade higher both from valuation expansion and earnings upgrades as the Jokowi-led government irons out the hiccups. We note that consensus’ earnings are 31% and 13% lower than guidance for PTPP and WSKT, leaving room for upgrades should project flows surpass expectations.

Top picks: PTPP and WSKT. PTPP remains our top pick for its healthy cash flow trend and limited exposure to high-risk, capital intensive infrastructure investments. We believe PTPP is a safer bet to play Indonesia’s infrastructure theme. We also upgrade WSKT to BUY due to its strong revenue visibility and earnings momentum. This comes from its more assured pipeline of high-margin toll contract wins.

JCI : 4,615.16

Analyst Tjen San Chong +603 2604 3972; [email protected] Tiesha Putri +6221 30034931; [email protected]

STOCKS

Source: AllianceDBS Research, DBS Vickers Waskita Karya : PT Waskita Karya Tbk, is a stated owned construction company engaging in a wide variety of construction activities including highways, bridges, ports, airports, buildings, sewerage plants, cement plants, factoreis and other industrial facilities.

Pembangunan Perumahan : PT PP (Persero) is Indonesia's leading construction company with business portfolio ranging from building constructions and civil infrastructure constructions.

Wijaya Karya : Wijaya Karya is a construction company with interests in EPC, civil, building works, precast and realty.

Wijaya Karya Beton : Wika beton (a subsidiary of Wikaya Karya) is a leader in precast in Indonesia with c.40% market share.

Construction companies’ PE valuation range since 2012 (x)

Source: AllianceDBS Research, DBS Vickers

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DBS Group Research . Equity 1 Feb 2016

Indonesia Industry Focus

Indonesia Construction

Refer to important disclosures at the end of this report

Price Mkt Cap Target Price Performance (%)

Rp US$m Rp 3 mth 12 mth Rating

Waskita Karya 1,735 1,723 2,150 6.4 8.5 BUY Pembangunan 3,900 1,382 4,650 2.4 2.6 BUY Wijaya Karya 2,800 1,260 2,850 (4.8) (23.8) HOLD Wijaya Karya Beton 990 631 1,000 1.0 (26.7) HOLD

Industry Focus


A good time for an infrastructure push

Slowing economy adds to the urgency for infrastructure push. The slowing economy has seen the following similar trend in ASEAN countries including Indonesia: rising infrastructure spending. In Indonesia, the government has allocated Rp314tn budget for 2016 (+8% y-o-y), which is expected to stimulate jobs and provide a buffer to the slowing domestic economy. Second year should be better than the first. Joko Widodo’s administration announced its ambitious plans in Oct-14 when it took office, to narrow the infrastructure deficit. Nonetheless, delivery had been slow in the first few months of his administration due to transitional issues, particularly state budget revisions and some structural changes made to ministries involved. With a pre-approved budget and enhanced regulations in place, we believe the government will be better equipped in delivering on its promise in its second year of administration. We also note that the government has taken some initiatives to accelerate the progress in 2016 such as:

a) Early auction of road projects. In an attempt to expedite budget absorption, Ministry of Public Housing and Works (MoPWH) has tendered out 2016 road projects worth Rp30tn (29% of ministry’s budget in FY16) in 4Q15. This was followed by signing of contracts for projects worth Rp8.8tn in the first week of Jan 2016. This initiative is expected to push the MoPWH‘s budget absorption to 5-6% by the end of January vs. a mere 0.1% recorded in Jan 2015.

b) 2016 budget pre-funding. In addition to the time-consuming contract tenders and awarding process, the low tax revenue collected at the beginning of the year is also one of the main reasons for the low budget absorption trend in 1H. To prevent this, the government had secured Rp64tn cash from a bond auction to fund the 2016 state budget before the commencement of the new year.

c) Continuous land acquisition reform. Land disputes had

been a persistent stumbling block in the past. In March 2015, Joko Widodo’s administration enforced the full implementation of land clearing act No. 2/2012. The new act also provides more clarity on the time frame of the process by limiting it to 559 days at the longest. The time frame was further shortened to 512 days through the issuance of Presidential Decree No. 148/2015. More

progress should be seen in 2H16. In addition, private sector participation in land compensation payment is now allowed. The project owner is now able to cover the payments to speed up process and ask for reimbursement from state budget later. One major progress made this year is the completion of land clearing for Batang power plant, a project which had stalled for 4 years due to land issues.

Ministry of Public Works & Housing’s budget absorption

Source: TEPRA, AllianceDBS, DBS Vickers Ministry of Transportation’s budget absorption

Source: TEPRA, AllianceDBS, DBS Vickers Expanding role of state-owned contractors We believe Indonesia is still in the early phase of the construction boom as reflected in the low participation rate from the private sector. Nowadays, most of the infrastructure projects are still handled by government agencies or assigned to SOEs. These projects will be the first test of the government’s ability to tackle red tape. Successful execution will help to galvanise the

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Industry Focus


participation of private sector interests in the form of Public Private Partnerships (PPP) and lead to more job flows for both state-run and private contractors in the subsequent stages. Budget structure suggests increasing participation from SOEs. 2016 state budget structure reflects the government’s effort to decentralize the infrastructure budget. The budget at the ministerial level was reduced by Rp29tn (-15% y-o-y), while capital injection to SOEs was raised by Rp11tn (+40% y-o-y), which shows the government’s effort to increase participation from SOEs in narrowing the country’s infrastructure deficit. This is good news for state-own contractors since the additional equity will create a multiplier effect on future construction job flows. Infrastructure budget

APBNP 2015

RAPBN 2016

Growth y-o-y

Ministerial spending 196 168 -15% Public Works & Housing 111 101 -9% Transportation 59 47 -20% Agriculture 9 6 -30% Energy & Mineral Resources 8 4 -56% Non-ministerial spending 7 5 -25% Transfer to region & village fund 41 79 94% Special allocation fund 30 57 93% Village fund 8 19 127% Capital expenditure 36 50 41% Investment 5 9 80% Capital injection to SOE 29 40 40% Social infrastructure 7 7 0% Infrastructure support 4 5 21% Total 290 314 8%

Source: Ministry of Finance, AllianceDBS, DBS Vickers Capex on the rise. With an estimated Rp4,000tn infrastructure deficit, the build out tasks are too huge to be handled by the government alone. SOEs, including state-run contractors, are expected to take part in the infrastructure push by initiating projects as well as investing in the infrastructure assets. Taking on this role means that the earnings generated from the related construction work will be ploughed back into the SPV/infrastructure assets. We note that infrastructure is a long term investment, hence cash generation may deteriorate in the early years of operations. Having said that, we believe a strong balance sheet is needed to sustain growth. Contractors with ample room for leverage will have a competitive edge to take up more projects in the future.

The chart below shows a surge in contractors’ FY16 capex budget with WIKA showing the most prominent increase. The company has been building recurring income sources through investments in power plants and recently the Jakarta-Bandung high-speed railway. WIKA’s FY16 budget is expected to go up to Rp10.5tn if the rights issue plan goes through this year. This represents 0.9x of its equity base post rights issue. State-run contractors’ capex budget

*assuming no rights issue in 2016 Source: Companies, AllianceDBS, DBS Vickers

State-run contractors’ leverage and capex

*assuming no rights issue in 2016 Source: Companies, AllianceDBS, DBS Vickers

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Industry Focus


SOE consolidation− the next big catalyst Planned corporate actions in 2016-2018

Year Plan

2016 WSKT to acquire ADHI

2017 Indah Karya, Yodya Karya and Bina Karya (not listed) to merge under WIKA

Assets owned by Brantas Adipraya, Amarta Karya and Rekayasa Industri (not listed) to be injected to WIKA

WSKT to receive capital injection

2018 PTPP to acquire Nindya Karya and Virama Karya (not listed)

Jasa Marga to acquire WSKT

Jasa Marga to receive capital injection

Source: Various media sources, AllianceDBS, DBS Vickers As stipulated in the SOE Road Map 2015-2019, the government will work to consolidate state-run contractors and infrastructure companies starting this year. Looking at the current fragmented structure of the Indonesian construction sector, the move should be longer term positive. There are not much details provided at this moment, however given that most of the companies involved are currently in an expansion mode and require high capital investment, a share swap seems to be the most likely scenario.

It remains to be seen whether the government can execute the plan as scheduled. The first test will be the acquisition of ADHI by WSKT, which is slated to kick off this year. While ADHI should stand to benefit the most from this acquisition plan due to the high valuation discount relative to WSKT (30-60% discount in the last 12 months), this acquisition will in return provide WSKT access to ADHI’s property business and additional order book from Jakarta LRT (Rp34tn). This income stream would help to cover start-up losses from WSKT’s toll road business. We ran a quick calculation on the possible WSKT-ADHI share swap scenario. Assuming that no cost savings are realised through the acquisition, our calculation suggests that a share swap of 1.3 ADHI share for 1 WSKT will still be earnings accretive. Also worth noting is that some of the plans involve non-listed, small scale contractors whose financial performances are unknown. We are cautious on this M&A plan since these small contractors are often associated with poor profitability and cash flow management, and hence may be potentially negative for PTPP and WIKA.

A quick calculation on WSKT-ADHI share swap scenario

*Based on Bloomberg consensus Source: Bloomberg Finance L.P, AllianceDBS, DBS Vickers

Key assumptions ADHI WSKT

Net profit FY15F (Rp bn) * 405 821

Shares outstanding (bn) 3.56 13.57

EPS FY15F (Rp) 114 61

Share price (Rp/share) 1,735

ADHI transaction price (Rp/share) 2,300 2,400 2,500 2,600 2,700 2,800 2,900 3,000

Implied PE (x) for acquisition 20.2 21.1 22.0 22.9 23.8 24.6 25.5 26.4

Transaction value (Rp bn) 8,190 8,546 8,903 9,259 9,615 9,971 10,327 10,683

Share swap ratio 1.33 1.38 1.44 1.50 1.56 1.61 1.67 1.73

New shares issued via share price (bn) 6.26 6.81 7.39 8.00 8.62 9.27 9.95 10.65

Enlarged share base (bn shares) 19.83 20.39 20.97 21.57 22.20 22.85 23.52 24.22

WSKT's EPS (Rp) 41.4 40.3 39.2 38.1 37.0 36.0 34.9 33.9

% dilution from base -32% -33% -35% -37% -39% -41% -42% -44%

Merged EPS 61.8 60.1 58.5 56.8 55.2 53.7 52.1 50.6

% dilution/accretion from base 2% -1% -3% -6% -9% -11% -14% -16%

Industry Focus


Government projects & progress

1,000 km new toll roads. Among the various government programs, toll road projects have recorded the most notable progress to date. There were152 km of new toll roads added last year (13% of the 1,000 km target), bringing total operational toll roads to 952 km. The government targets to operate 136 km new toll roads this year, while the remainder is expected to come onstream in 2017-2018. There are also several major toll road projects scheduled to break ground in 2016 as shown in the table below. Major toll road projects in 2016

Project Length (km)

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contractors

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99 15 Prequalification

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Manado-Bitung 40 5 Prequalification

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Total 292 56

Source: Various media sources, AllianceDBS, DBS Vickers 35 GW power plants. As of 2015, PLN had entered into agreements with 46 independent power producers (IPP) for additional power capacity of 17 GW. These projects are scheduled to break ground in 2016. Within our coverage, WIKA has the highest exposure to power projects. The company is bidding for 9-40% stakes in 8 power plants with total capacity of 6 GW. This year, PTPP intends to bid for more IPP projects. 3,258 km of railways. A significant progress made on the railway development plan is the groundbreaking of Borneo Railway in November 2015 after a delay of 4 years. In the first phase, the Russian Railway will build 192 km railway from Buluminung port to West Kutai in East Kalimantan. For now, WTON is the only state-run precast producer able to produce railway sleepers. Excellent progress on railway build-out should translate to larger new orders for WTON. 24 new seaports. One out of three planned terminals in New Priok port will be operational this year. Progress has also been

made on the Kuala Tanjung and New Makassar ports which commenced construction in 2015. Overall, seaports development was rather slow last year. The mega project, Cilamaya deep sea port, was cancelled; however the replacement project will be announced later this year. One big port project that will possibly be tendered and awarded this year is Pelindo II’s New Priok port Phase 2 worth c. Rp4tn. PTPP is currently finishing the construction work for New Priok port Phase 1, worth Rp8.7tn. If it manages to deliver the project successfully this year, there is a high chance of PTPP clinching the Phase 2 tender. 15 new airports and revitalisation of 10 airports. The Ministry of Transportation is currently renovating 50 airports across Indonesia and building 15 new airports in remote areas. 1 million houses. The realisation fell short of target with only 745,144 houses built in 2015. This year, the government has maintained the target at 1,000,000 units. There are also 7 mega projects that broke ground in 2015, three of which are projects that were delayed for years due to either land acquisition or funding issues. Most of the projects are expected to complete within 2-3 years. Mega projects that broke ground in 2015

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Kuala Tanjung multipurpose terminal (phase 1)

4.8 Pelindo I Jan-15 PTPP

Trans Sumatera toll road, Palembang-Indralaya section

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Marga

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Trans Java toll road, Solo-Kertosono section

9.5 Jasa Marga & WSKT

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Makassar New Port (phase 1A)

7 Pelindo IV May-15 PTPP

Batang power plant

55 Bhimasena Power

Indonesia

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Jakarta LRT 34 Gov. of Jakarta

Sep-15 ADHI

Borneo Railway 22 Russian Railway

Nov-15 Possibly WTON

Source: Various medias, AllianceDBS, DBS Vickers

Industry Focus


Mega projects to be the main growth driver in 2016

Despite softer growth of the state’s infrastructure budget, state-run contractors are guiding for a higher new orders this year at Rp148.9tn (vs. Rp96.3tn in FY15). The four listed state-run contractors are looking at a 55% y-o-y growth vs. 38% y-o-y in FY15. Projects funded by SOE capital injections and rights issue will contribute the most to this increase. These projects are: 1. Jakarta-Bandung HSR (Rp34tn). The contract will be split

into two phases with a value of Rp17tn each. Phase 1 will be awarded to WIKA this year, contributing 32% to WIKA’s new order target for this year.

2. Jakarta-Cibubur LRT (Rp34tn). ADHI will be the main contractor.

3. Waskita Karya’s toll roads (Rp20tn). 4. Jawa V power plant (Rp10tn). WIKA has a high chance of

getting this project. New order growth

Source: Companies, AllianceDBS, DBS Vickers Valuation and recommendation Valuation has corrected to a more reasonable level. Slower-than-expected project execution along with capital outflows led to a de-rating in the construction sector’s valuation last year. The sector’s PE multiple has now reverted to 20x from a peak of 27x in Feb 2015. We believe there is room for re-rating if government and contractors manage to improve on execution.

Construction sector 12-month forward PE

Source: Bloomberg Finance L.P, AllianceDBS, DBS Vickers Construction sector vs. JCI 12-month forward PE

Source: Bloomberg Finance L.P, AllianceDBS, DBS Vickers Stock picks. We recommend investors to stick with companies with strong earnings visibility, as reflected in its order book size. In addition, we believe balance sheet strength is important during this boom phase. One evident trend that we have observed lately is contractors’ increasing investments in infrastructure assets to support order book growth. Contractors with strong balance sheets, or those who are expanding within their balance sheet capacity, would have greater ability to sustain growth in the future. PTPP: A safer bet. PTPP is our top pick in the sector. We believe PTPP is a safer bet on the Indonesia construction up-cycle given its very limited exposure to high-risk, capital intensive projects. With expertise in port construction, PTPP is set to benefit from Joko Widodo’s sea toll program and Pelindo’s higher capex. We maintain our BUY call on PTPP with TP of Rp4,650 (25x FY16F EPS). WTON: The clear beneficiary of HSR. After a lackluster year in 2015 where most of the contract awards were late, 2016 looks to be a more promising year for WTON. The company has been

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Industry Focus


appointed as the main precast supplier for Jakarta-Bandung HSR. It expects to clinch new orders of Rp6-9tn from projects in 2016-2018, nearly 3x WTON’s revenue. The stock has significantly outperformed JCI YTD and now trades at 25x FY16F EPS−a level that we believe is fair. There could be upside to our forecast if WIKA, WTON’s parent company, wins Jakarta Giant Sea Wall and Bandung LRT projects. We maintain our HOLD call on WTON with TP of Rp1,000. WSKT: Expanding at full speed. We upgraded WSKT to a BUY with an SOTP-based TP of Rp2,150 (implies 24x FY16E EPS). With 12 toll roads in its portfolio and enlarged equity base post rights issue last year, WSKT undoubtedly leads the earnings race among state-run contractors. We are confident that WSKT could achieve its Rp40tn new contract target this year with 50% of the target coming from its toll road concessions. Moreover, we see a case of margin expansion this year as revenue from its toll road construction increases. WIKA: Unblocking the pipeline. WIKA’s new order book is set to surge this year after the Jakarta-Bandung HSR construction kicks off. The company targets to bag Rp52tn new contracts in FY16, double from FY15. Nonetheless, we doubt that WIKA’s earnings growth will be able to track its order book growth due to potential margin dilution and high execution risk on some of its mega projects. Meanwhile, the company may have to look for alternative sources of funds to finance its projects until government capital injection is approved and disbursed. Maintain HOLD with TP of Rp2,850 (22x FY16F EPS). DBSVI & consensus’ FY16F earnings vs. company

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WSKT 1,191 1,042 1,500 0.79 0.69

PTPP 897 909 1,050 0.85 0.87

WIKA 797 790 820 0.97 0.96

WTON 348 292 212* 1.65 1.38

(*) ex-high speed railway. Source: Companies, Bloomberg Finance L.P, AllianceDBS, DBS Vickers

WSKT’s consensus earnings trend vs. share price

Source: Bloomberg Finance L.P, AllianceDBS, DBS Vickers PTPP’s consensus earnings trend vs. share price

Source: Bloomberg Finance L.P, AllianceDBS, DBS Vickers WIKA’s consensus earnings trend vs. share price

Source: Bloomberg Finance L.P, AllianceDBS, DBS Vickers

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Industry Focus


WTON’s consensus earnings trend vs. share price

Source: Bloomberg Finance L.P, AllianceDBS, DBS Vickers Key risks Tax revenue shortfall. The government has set out an ambitious tax revenue target of Rp1,360tn in the 2016 state budget, a 28% y-o-y increase from last year. Failure to meet this target could lead to spending cuts and delays in project execution.

Low budget absorption at regional level. There is a change in the infrastructure budget structure this year with more funds shifted from ministries to regional governments. This raises concerns on regional government’s ability to spend the budget given the low expenditure track record in the past. Political headwinds. Current administration has not secured a majority of seats in the parliament. Conflicting interest between government and opposing parties may impede reform momentum. A case in point is the Rp40tn capital injection plan to SOEs that is currently frozen by the parliament. Human resource constrains. The huge backlog and future job flows require contractors to increase human resource capacity. The lack of skilled project managers could result in a delay in project execution.

Sector comparison

Source: Bloomberg Finance L.P, AllianceDBS, DBS Vickers

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MarketCap Price Rec. TP EPS CAGR

(IDR bn) (IDR) FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15F-17F

Wijaya Karya 17,218 2,800 Hold 2,850 29.0 21.6 3.9 3.3 13.5 13.3 0.7% 0.7% 14% 17% 31%

PT PP (Persero) 19,176 3,960 Buy 4,650 27.7 21.4 5.0 4.2 15.3 10.8 0.7% 0.9% 22% 21% 28%

Waskita Karya 23,684 1,745 Buy 2,150 28.5 19.6 2.6 2.4 19.6 16.7 0.7% 1.0% 14% 13% 10%

Adhi Karya 9,080 2,550 N/R N/A 17.9 16.2 1.8 1.6 7.0 5.7 1.2% 1.3% 13% 12% 22%

Wijaya Karya Beton 8,410 965 Hold 1,000 39.9 24.1 3.7 3.3 16.3 22.1 1.2% 0.8% 10% 15% 51%

Simple average 28.6 20.6 3.4 3.0 14.3 13.7

Weighted average 28.4 20.6 3.5 3.0 15.4 13.8

DilutedPE (x) ROE

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Industry Focus


Company Guides

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: MA

BUY (Upgrade from HOLD)

Last Traded Price: Rp1,735 (JCI : 4,615.16) Price Target : Rp2,150 (24% upside) (Prev Rp1,700) Potential Catalyst: Award of a large-sized contract Where we differ: Our FY16F earnings is 14% higher than consensus Analyst Tjen San Chong +603 2604 3972 [email protected] Tiesha Putri +6221 30034931 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2014A 2015F 2016F 2017FRevenue 10,287 14,327 20,318 25,483EBITDA 933 1,300 1,954 2,524Pre-tax Profit 756 1,125 1,618 1,527Net Profit 502 821 1,191 994Net Pft (Pre Ex.) 502 799 1,191 994Net Pft Gth (Pre-ex) (%) 36.3 59.2 49.2 (16.6)EPS (Rp) 51.9 61.3 89.0 74.2EPS Pre Ex. (Rp) 51.9 59.6 89.0 74.2EPS Gth Pre Ex (%) 36 15 49 (17)Diluted EPS (Rp) 51.9 61.3 89.0 74.2Net DPS (Rp) 10.4 12.3 17.8 14.8BV Per Share (Rp) 294 662 739 795PE (X) 33.4 28.3 19.5 23.4PE Pre Ex. (X) 33.4 29.1 19.5 23.4P/Cash Flow (X) nm nm nm nmEV/EBITDA (X) 19.5 16.6 14.2 11.5Net Div Yield (%) 0.6 0.7 1.0 0.9P/Book Value (X) 5.9 2.6 2.3 2.2Net Debt/Equity (X) 0.5 CASH 0.4 0.5ROAE (%) 19.2 14.0 12.7 9.7

Earnings Rev (%): 9 18 5Consensus EPS (Rp): 59.6 78.4 97.4Other Broker Recs: B: 19 S: 1 H: 5

Source of all data: Company, AllianceDBS Research, Bloomberg Finance L.P

Expanding at full speed Upgrade to BUY. We raise WSKT’s FY16F/FY17F net profit by 18%/5% as we revise up our order book assumptions and margins. Consequently, we raise our TP to Rp2,150 (from Rp1,700) and upgrade our call to BUY. We now assume new contracts of Rp40tn in FY16F, in line with management’s guidance. WSKT’s toll roads are expected to contribute 50% to FY16 new contracts (Rp20tn vs. c. Rp10tn in FY15). This opens up a possibility of margin expansion as WSKT typically charges a premium for its toll road’s construction works (13% vs. normal margin 10-11%). Most assured contract wins. We are confident that WSKT could achieve its Rp40tn new contract wins target this year with Rp20tn coming from its toll roads and Rp7tn from Palembang LRT. The new wins will bring its total order book to Rp78tn, making it one of the strongest contractors in terms of revenue visibility with an order book of 5.4x FY15F revenue. Further fund raising needed. The company is guiding for Rp5-6tn capex in FY16 (vs. Rp4.3tn budgeted in FY15). Capex should continue to trend upwards as the company expands its toll road portfolio. We estimate that WSKT would need Rp16.9tn to fund its equity stakes in the existing portfolio in 2015-2018, c.30% of which was already disbursed last year. To fund FY16-17 capex, WSKT plans to issue Rp5tn bonds in stages with the first Rp2tn being issued in 1H16. It also plans to divest 30% of its shares in Waskita Precast this year and proposes a Rp3.1tn capital injection to the government in 2017. Valuation:

We value WSKT’s construction business at 22x FY16 PE. As for the toll roads, we value three toll roads that will be operational in 2017 using the DCF method. Our new TP of Rp2,150 implies 24x FY16F PE. Key Risks to Our View:

Delay in project execution. Delay in project execution could lead to lower earnings and trigger negative sentiments towards Indonesia's construction sector. At A GlanceIssued Capital (m shrs) 13,572Mkt. Cap (Rpbn/US$m) 23,548 / 1,723Major Shareholders

Republic of Indonesia (%) 68.0Free Float (%) 32.03m Avg. Daily Val (US$m) 3.7ICB Industry : Industrials / Construction & Materials

DBS Group Research . Equity 1 Feb 2016

Indonesia Company Guide

Waskita Karya Edition 2 | Bloomberg: WSKT IJ | Reuters: WSKT.JK Refer to important disclosures at the end of this report

89

139

189

239

289

339

389

439

489

333.4

533.4

733.4

933.4

1,133.4

1,333.4

1,533.4

1,733.4

1,933.4

Dec-12 Jan-14 Jan-15 Jan-16

Relative IndexRp

Waskita Karya (LHS) Relative JCI INDEX (RHS)

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

Waskita Karya

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Rerouting business plan. The toll road acquisition spree done last year marked a change in WSKT’s business model. The company is now aiming to become one of the leading toll road operators in Indonesia by 2018. The company currently owns 12 toll road concessions with total length of 539 km. It recently increased its effective ownership in three Trans Java toll roads i.e. Pejagan-Pemalang, Kanci-Pejagan and Pasuruan-Probolinggo by acquiring all of MNC’s shares in the concessions. Post acquisitions, MNC’s buyback options on these toll roads were legally terminated. Margin expansion on the cards. We estimate that the construction works for these 12 toll road concessions could be worth over Rp40tn. Approximately Rp10tn has been included in FY15's new order book. This year, the management expects to book Rp20tn new contracts from its self-owned toll roads (50% of its targeted new order book). Interestingly, WSKT will be able to charge a premium for the construction work of its owned toll roads. The average gross margin for these construction works is 13% vs. 10-11% for other infrastructure projects. Another rights issue in 2017? The cyclical nature of construction business and intensifying competition among contractors are the main reasons of WSKT’s expansion into the toll road operating business. While this expansion should secure a recurring income stream in the long term, this exposes WSKT to financial and traffic risks particularly during the initial years of toll road operations. Given the high capital requirement and long gestation period of the business, the toll road acquisition spree done last year have raised concerns on WSKT’s ability to fund its expansion plan. Assuming a capital structure of 70% debt and 30% equity for the 12 toll roads, WSKT needs to invest Rp16.9tn to fund its equity stakes. The company will have to increase its gearing given that the Rp5.3tn rights issue proceeds received last year can only cover 31% of the equity investment requirement. WSKT is considering divesting 30% of its shares in Waskita Precast through an IPO this year to raise Rp1-2tn cash. It will also propose Rp3.1tn capital injection from the government in 2017. One more alternative funding that the company is considering is to partially divest its toll roads once the construction completes.

New Contract Wins (Rp bn)

Order Book (Rp bn)

Construction Gross Margin (%)

Revenue to order book ratio

Toll road equity investment’s funding structure (Rp tn)

Source: Company, AllianceDBS Research

13318

22625

30000

40000

30575

0

5,100

10,200

15,300

20,400

25,500

30,600

35,700

2013A 2014A 2015F 2016F 2017F

22,133.0

33,141.0

51,955.1

77,710.5

88,640.2

0

18,100

36,200

54,300

72,400

2013A 2014A 2015F 2016F 2017F

9.410.1 10.5

11.5 11.8

0.0

2.4

4.8

7.2

9.6

12.0

2013A 2014A 2015F 2016F 2017F

58%

38%33%

28%33%

0%

10%

20%

30%

40%

50%

60%

70%

2013 2014 2015F 2016F 2017F

5.0

5.0

2.0

4.9

2015 rights issue Bonds Waskita Precast IPO 2017 rights issue


Company Guide

Waskita Karya

Balance Sheet:

Further fund raising needed. As at September 30, WSKT had a net debt of only Rp62bn post the completion of the capital injection and rights issue in July. However, we expect its debt to rise in the future as the company extends its business model to include the capital-intensive toll road operating business and expansion of its precast business. Based on our calculation, WSKT needs to leverage up the rights issue proceeds by 4.2x to fund the toll road investments. Aside from the plan to divest its stakes in Waskita Precast through IPO, the company also plans to raise funds by issuing bonds amounting to Rp3–5tn in 2016.

Share Price Drivers:

Award of large-sized infrastructure contracts. The awards of large-sized, multi-year projects will improve WSKT’s revenue and earnings visibility, and ultimately lead to an upward re-rating of its share price. Incremental value from toll roads. To better capture the toll road operating business, we incorporate the NPV of WSKT’s toll roads that will be operational in 2017 into our TP, i.e. Pejagan-Pemalang, Depok-Antasari and Kanci-Pejagan. We assume that each toll road will achieve WSKT’s expected traffic volume by year 3. For the traffic volume, we assumed a CAGR of 12-20% in the first 10 years, 5-7% in the following 10 years and 2% up to year 40 when the concessions end. Based on our DCF calculation (WACC 9.6%), these toll roads add Rp2.7tn incremental value to WSKT or a Rp200 increase to our TP. Note that our project IRR assumptions of 13-14% are lower than management’s guidance of 17% and we have yet to include the remaining nine toll roads into our TP calculation.

Key Risks:

Persistently weak operating cash flow. We have yet to see positive operating cash flows at WSKT despite its strong contract wins last year. Its venture into the toll road operating business could also deteriorate WSKT’s operating cash flow during the early years of operations. As such, its balance sheet could remain stretched, forcing it to make another rights or bond issue in the future. Unsustainable precast margins. We are cautious on the sustainability of its precast margins. The company expects to sustain the segment's gross margin at 15%. However, we think this will be challenging given that Wika Beton, the market leader in precast business, only expects to sustain its gross margin at 13%. We believe this can only be achieved through continuous product innovation. High amount of prepaid tax. Among its SOE peers, WSKT is the most leveraged to government’s infrastructure development plan. Over the past three years, the government and SOE’s projects dominated WSKT’s portfolio with a

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.8

0.9

0.9

1.0

1.0

1.1

1.1

1.2

1.2

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2013A 2014A 2015F 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

2013A 2014A 2015F 2016F 2017F

Capital Expenditure (-)

Rp

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2013A 2014A 2015F 2016F 2017F

Avg: 16.9x

+1sd: 22x

+2sd: 27.1x

‐1sd: 11.8x

‐2sd: 6.7x6.0

11.0

16.0

21.0

26.0

31.0


(x)

Avg: 2.91x

+1sd: 3.79x

+2sd: 4.66x

‐1sd: 2.04x

‐2sd: 1.16x1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0


(x)


Company Guide

Waskita Karya

combined share of 70%. The tax regulations require WSKT to pay the VAT incurred to government or SOE clients which caused the company to record a high amount of prepaid VAT (Rp731bn as at Sep 30). It could take more than two years to disburse the tax refund, and hence further drag operating cash flows.

Company Background

PT Waskita Karya Tbk (WSKT) is a state-owned construction company 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. 80% of its revenues from construction and >50% of its projects from the Government of Indonesia.


Company Guide

Waskita Karya

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F

New Contract Wins (Rp 13,318 22,625 30,000 40,000 30,575 Order Book (Rp bn) 22,133 33,141 51,955 77,711 88,640 Construction Gross 9.40 10.2 10.5 11.5 11.8

Segmental Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F

Revenues (Rpbn)

Construction 9,559 9,484 11,919 16,706 21,084 Building rentals/Property 0.26 0.32 0.26 0.26 0.0 Precast 127 803 2,408 3,612 4,153 Energy 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 246Total 9,687 10,287 14,327 20,318 25,483Gross Profit (Rpbn)

Construction 899 963 1,252 1,921 2,488 Building rentals/Property 0.26 0.32 0.26 0.26 0.0 Precast 11.8 146 349 488 561 Energy 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 246Total 911 1,109 1,601 2,409 3,295Gross Profit Margins (%)

Construction 9.4 10.1 10.5 11.5 11.8 Building rentals/Property 100.0 99.7 99.7 99.7 N/A Precast 9.3 18.2 14.5 13.5 13.5 Energy N/A N/A N/A N/A N/A Others N/A N/A N/A N/A 100.0Total 9.4 10.8 11.2 11.9 12.9

Income Statement (Rpbn)

FY Dec 2013A 2014A 2015F 2016F 2017F

Revenue 9,687 10,287 14,327 20,318 25,483Cost of Goods Sold (8,776) (9,178) (12,727) (17,909) (22,189)Gross Profit 911 1,109 1,601 2,409 3,295Other Opng (Exp)/Inc (340) (431) (544) (772) (1,341)Operating Profit 571 678 1,056 1,637 1,954Other Non Opg (Exp)/Inc 7.56 20.5 0.0 0.0 0.0Associates & JV Inc 103 197 186 235 259Net Interest (Exp)/Inc (69.7) (140) (140) (255) (686)Exceptional Gain/(Loss) 0.0 0.0 22.8 0.0 0.0Pre-tax Profit 611 756 1,125 1,618 1,527Tax (243) (254) (304) (426) (533)Minority Interest 0.09 0.32 0.20 0.29 0.24Preference Dividend 0.0 0.0 0.0 0.0 0.0Net Profit 368 502 821 1,191 994Net Profit before Except. 368 502 799 1,191 994EBITDA 734 933 1,300 1,954 2,524Growth Revenue Gth (%) 10.0 6.2 39.3 41.8 25.4EBITDA Gth (%) 16.2 27.1 39.3 50.4 29.2Opg Profit Gth (%) 27.5 18.9 55.7 54.9 19.3Net Profit Gth (Pre-ex) (%) 44.9 36.3 59.2 49.2 (16.6)Margins & Ratio Gross Margins (%) 9.4 10.8 11.2 11.9 12.9Opg Profit Margin (%) 5.9 6.6 7.4 8.1 7.7Net Profit Margin (%) 3.8 4.9 5.7 5.9 3.9ROAE (%) 16.8 19.2 14.0 12.7 9.7ROA (%) 4.3 4.7 5.1 5.0 3.4ROCE (%) 8.1 8.2 7.9 7.9 6.8Div Payout Ratio (%) 30.0 20.0 20.0 20.0 20.0Net Interest Cover (x) 8.2 4.8 7.6 6.4 2.8


Precast revenue to contribute 18% of WSKT's consolidated revenue.

Construction gross margin is expected to increase as WSKT charges a premium for its self-owned toll road’s construction works.

We expect interest expense to surge in FY17F as WSKT will no longer be able to capitalise the interest costs.

Expect a lower net income y-o-y due to toll roads’ start-up losses.


Company Guide

Waskita Karya

Quarterly / Interim Income Statement (Rpbn)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015

Revenue 2,099 5,006 1,403 2,581 3,438Cost of Goods Sold (1,911) (4,397) (1,246) (2,258) (3,024)Gross Profit 188 609 157 324 413Other Oper. (Exp)/Inc (97.0) (158) (50.0) (90.6) (112)Operating Profit 91.0 451 107 233 301Other Non Opg (Exp)/Inc 2.44 (4.3) (18.0) 1.35 (4.3)Associates & JV Inc 62.9 89.3 11.1 37.2 14.4Net Interest (Exp)/Inc (31.1) (55.4) (50.2) (67.6) (27.6)Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 22.8Pre-tax Profit 125 480 50.1 204 307Tax (57.1) (108) (38.2) (44.7) (77.7)Minority Interest 0.09 0.08 0.0 0.08 (0.1)Net Profit 68.3 372 11.9 160 229Net profit bef Except. 68.3 372 11.9 160 206EBITDA 156 536 100 272 311 Growth Revenue Gth (%) (2.2) 138.5 (72.0) 84.0 33.2EBITDA Gth (%) 9.9 242.5 (81.3) 171.1 14.5Opg Profit Gth (%) 12.1 394.9 (76.2) 117.5 29.1Net Profit Gth (Pre-ex) (%) 26.1 445.6 (96.8) 1,238.9 29.0Margins Gross Margins (%) 9.0 12.2 11.2 12.5 12.0Opg Profit Margins (%) 4.3 9.0 7.6 9.0 8.8Net Profit Margins (%) 3.3 7.4 0.8 6.2 6.7

Balance Sheet (Rpbn) FY Dec 2013A 2014A 2015F 2016F 2017F

Net Fixed Assets 415 622 2,564 7,796 8,046Invts in Associates & JVs 343 735 735 735 735Other LT Assets 249 661 661 661 661Cash & ST Invts 1,144 1,700 4,772 2,746 2,462Inventory 281 327 422 593 728Debtors 5,654 7,261 8,994 12,755 15,997Other Current Assets 702 1,236 1,627 2,159 2,644Total Assets 8,788 12,542 19,776 27,443 31,272 ST Debt 875 1,917 1,917 1,917 1,917Creditor 4,086 5,272 6,485 9,126 11,199Other Current Liab 466 539 539 539 539LT Debt 748 1,246 1,246 5,246 6,246Other LT Liabilities 230 719 719 719 719Shareholder’s Equity 2,382 2,843 8,864 9,891 10,646Minority Interests 1.04 5.86 5.66 5.37 5.13Total Cap. & Liab. 8,788 12,542 19,776 27,443 31,272 Non-Cash Wkg. Capital 2,085 3,014 4,019 5,842 7,631Net Cash/(Debt) (479) (1,463) 1,610 (4,417) (5,701)Debtors Turn (avg days) 195.7 229.1 207.1 195.4 205.9Creditors Turn (avg days) 160.1 186.8 169.4 159.8 169.6Inventory Turn (avg days) 14.1 12.1 10.8 10.4 11.0Asset Turnover (x) 1.1 1.0 0.9 0.9 0.9Current Ratio (x) 1.4 1.4 1.8 1.6 1.6Quick Ratio (x) 1.3 1.2 1.5 1.3 1.4Net Debt/Equity (X) 0.2 0.5 CASH 0.4 0.5Net Debt/Equity ex MI (X) 0.2 0.5 CASH 0.4 0.5Capex to Debt (%) 14.1 10.4 63.2 74.2 6.9Z-Score (X) NA NA NA NA NA


Back to net debt position.


Company Guide

Waskita Karya

Cash Flow Statement (Rpbn)

FY Dec 2013A 2014A 2015F 2016F 2017F

Pre-Tax Profit 611 756 1,125 1,617 1,526Dep. & Amort. 52.9 37.2 57.3 81.3 311Tax Paid (243) (254) (304) (426) (533)Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0Chg in Wkg.Cap. (623) (753) (1,005) (1,823) (1,789)Other Operating CF (183) 126 0.0 0.0 0.0Net Operating CF (385) (88.7) (127) (551) (485)Capital Exp.(net) (229) (329) (2,000) (5,313) (561)Other Invts.(net) (16.8) 0.0 0.0 0.0 0.0Invts in Assoc. & JV (135) (755) 0.0 0.0 0.0Div from Assoc & JV 0.59 1.15 0.0 0.0 0.0Other Investing CF 1.64 0.0 0.0 0.0 0.0Net Investing CF (379) (1,082) (2,000) (5,313) (561)Div Paid (20.3) (110) (100) (164) (238)Chg in Gross Debt (297) 1,782 0.0 4,000 1,000Capital Issues 0.0 59.2 5,300 0.0 0.0Other Financing CF 0.0 (3.1) 0.0 0.0 0.0Net Financing CF (317) 1,728 5,200 3,836 762Currency Adjustments 17.1 (1.2) 0.0 0.0 0.0Chg in Cash (1,064) 556 3,073 (2,028) (284)Opg CFPS (Rp) 24.7 68.8 65.6 95.0 97.4Free CFPS (Rp) (63.7) (43.2) (159) (438) (78.1)


Target Price & Ratings History

Source: AllianceDBS Research

S.No. Date Closing PriceTarget Price

Rating

1: 27 Feb 15 1769 1287 FULLY VALUED

2: 04 May 15 1608 1287 FULLY VALUED

3: 27 May 15 1691 1287 FULLY VALUED

4: 10 Aug 15 1820 1305 FULLY VALUED

5: 11 Nov 15 1680 1700 HOLD

Note : Share price and Target price are adjusted for corporate actions.

1

2 3

4

5

1444

1544

1644

1744

1844

1944

Jan-15 May-15 Oct-15

Rp

We estimate 77% of the capex budget will be allocated for toll road expansion.

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: MA

BUY Last Traded Price: Rp3,770 (JCI : 4,537.38) Price Target : Rp4,650 (23% upside) Potential Catalyst: Award of a large-sized infrastructure contract Where we differ: Largely in line with consensus Analyst Tjen San Chong +603 2604 3972 [email protected] Tiesha Putri +6221 30034931 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Rp bn) 2014A 2015F 2016F 2017F Revenue 12,427 15,398 19,936 24,243 EBITDA 1,272 1,735 2,185 2,692 Pre-tax Profit 919 1,272 1,632 2,064 Net Profit 532 693 898 1,154 Net Pft (Pre Ex.) 532 693 898 1,154 Net Pft (ex. BA gains) N/A N/A N/A N/A EPS (Rp) 110 143 185 238 EPS Pre Ex. (Rp) 110 143 185 238 EPS Gth (%) 26 30 30 29 EPS Gth Pre Ex (%) 26 30 30 29 Diluted EPS (Rp) 110 143 185 238 Net DPS (Rp) 33 29 37 48 BV Per Share (Rp) 493 791 948 1,149 PE (X) 34.3 26.4 20.3 15.8 PE Pre Ex. (X) 34.3 26.4 20.3 15.8 P/Cash Flow (X) 64.7 52.5 391.6 46.6 EV/EBITDA (X) 14.6 10.3 9.2 8.1 Net Div Yield (%) 0.9 0.8 1.0 1.3 P/Book Value (X) 7.6 4.8 4.0 3.3 Net Debt/Equity (X) 0.1 CASH 0.3 0.5

ROAE (%) 24.3 22.3 21.3 22.7

Earnings Rev (%): (7) (1) 1 Consensus EPS (Rp): 145 194 253 Other Broker Recs: B: 24 S: 0 H: 1

Source of all data: Company, AllianceDBS, DBS Vickers, Bloomberg Finance L.P.

On a Solid Footing

A safer bet. We maintain our BUY call on PTPP with TP of Rp4,650. We like PTPP due to its strong balance sheet and healthy cash flow which should enable the company to take up more projects in the future. Unlike most of its SOE peers, PTPP does not invest in high-risk, capital-intensive projects. Although the company is planning to invest in more power plants in the coming years, it intends to acquire only a minority stake, hence limiting its exposure to the risk of start-up losses. Revenue visibility remains the strongest among peers with backlog of Rp41tn. PTPP won Rp21tn new contracts in 11M15, bringing the new contract realisation to 78% of our/management’s target for FY15. This makes PTPP the runner-up after WSKT in terms of new contract achievement YTD. As of Nov 30, PTPP had Rp41tn contract backlog (2.7x FY15F revenue), which is one of the highest among peers. Healthy cash flow trend. We like PTPP due to its excellent cash flow management and earnings quality. Among its peers, PTPP is the only company which managed to keep its operating cash flow positive in the last four years. A key reason is its more diversified customer base compared to other SOEs, with the private sector contributing 50-60% to PTPP’s order book. This leads to a lower prepaid tax. Valuation:

Our revised TP is pegged to 25x FY16 EPS, which is equal to +2SD of 5-year mean forward PE. We believe PTPP deserves to trade at a high valuation due to its strong track record and strong EPS growth potential (29% CAGR from FY15F-17F). Key Risks to Our View:

Prolonged slowdown in property sector. PTPP has both direct and indirect exposure to property sector. A prolonged slowdown in the economy and demand for property can negatively impact earnings and cash flows. At A Glance Issued Capital (m shrs) 4,842 Mkt. Cap (Rpbn/US$m) 18,256 / 1,322 Major Shareholders Republic of Indonesia (%) 51.0 Koperasi Karyawan Pemegang

6.2

Free Float (%) 42.8 3m Avg. Daily Val (US$m) 1.6 ICB Industry : Industrials / Construction & Materials

DBS Group Research . Equity 4 Dec 2015


PT PP (Persero) Edition 1 Version 1 | Bloomberg: PTPP IJ | Reuters: PTPP.JK Refer to important disclosures at the end of this report

90

290

490

690

890

1090

292.5

792.5

1,292.5

1,792.5

2,292.5

2,792.5

3,292.5

3,792.5

4,292.5


Relative IndexRp

Pembangunan Perumahan (LHS) Relative JCI INDEX (RHS)


Company Guide

PT PP (Persero)

Earnings revision summary We cut our net profit by 7%/1% for FY15F/FY16F after imputing a lower order book burn rate. A weaker economic environment has negatively impacted some of PTPP’s clients this year, causing them to delay their project construction.

Our FY15 revenue and net profit are broadly in line with management’s revised guidance. Despite the cut, we still expect PTPP’s net profit to grow strongly by 30% in FY15F and FY16F, outpacing its peers.

Earnings revision summary

2015 2016

Old New Changes Old New Changes

Revenue (Rp bn) 16,830 15,398 -9% 20,662 19,936 -4%

Gross profit (Rp bn) 2,187 2,014 -8% 2,692 2,630 -2%

EBIT (Rp bn) 1,845 1,717 -7% 2,272 2,162 -5%

Net profit (Rp bn) 745 693 -7% 902 898 -1%

Gross margin (%) 13.0 13.1 13.0 13.2

EBIT margin (%) 11.0 11.2 11.0 10.8

Net margin (%) 4.4 4.5 4.4 4.5

New contract win 26,839 26,792 0% 32,078 29,956 -7%

Total order book 52,330 56,659 8% 63,043 71,217 13%

Source : Company, AllianceDBS, DBS Vickers

PTPP’s major contract wins in 11M15

Project Location Contract value (Rp bn) Project owner

Reclamation of Mandala City Makassar, South Sulawesi 2,500 Gas engine power plant 120 MW Gorontalo, North Sulawesi 1,600 PLN

Kuala Tanjung port North Sumatera 898 Pelindo I

Gresik gas cogeneration plant East Java 625 Pupuk Indonesia

St. Moritz Makassar, South Sulawesi 524 Lippo Karawaci

New Priok port (additional work) Jakarta 497 Pelindo II

Kuala Namu-Tebing Tinggi toll road North Sumatera 448 Jasa Marga

Solo-Kertosono toll road Central Java 431 Jasa Marga



Company Guide

PT PP (Persero)


Earnings Drivers:

More port project rollouts in the next two years. PTPP is well positioned to benefit from Joko Widodo’s maritime axis vision. According to Bapennas, Indonesia would need as much as Rp59tn to develop and expand 24 ports from 2015-2019. Among the largest projects are the expansions of Kuala Tanjung port (Rp18.4tn) and Tanjung Perak port (Rp8.6tn). Both ports were initially built by PTPP, hence increasing the company's competitive edge to secure the work contracts once the projects are tendered out. We also note that next year, Pelindo I-IV, the SOEs that will carry out a large part of the government’s port development plan, have allocated capex of Rp14.6tn,16% higher than this year’s budget. Potential contract win from New Priok port Phase 2. The company won the construction work for the New Priok (Kalibaru) port back in 2012. Combined with the additional work won this year, New Priok port contributes Rp8.7tn to PTPP’s order book. PTPP had delivered 56% of the construction work up to Jun 30, therefore we estimate this project will still be able to contribute Rp3.8tn revenue in 2H15 up to its completion date in 2016. Pelindo II, the concession owner of New Priok port, also plans to tender out the Phase 2 expansion as early as next year. If PTPP manages to deliver Phase 1 successfully next year, we see a high chance for PTPP to win the Phase 2 tender. Additional growth boost from property arm. Although the execution of government’s infrastructure projects stalled in 1H15, PTPP managed to deliver strong earnings growth supported by its subsidiary, PP Properti (PPRO). Looking ahead, we expect the EBIT contribution of PPRO to stay at 22-23% vs. 11% in FY14. As property commands a significantly higher EBIT margin (25-27%) compared to core business construction (6-8%), this should lift up PTPP’s overall profitability. PPRO owns a 55-ha land bank with the Grand Kamala Lagoon (GKL) superblock in Bekasi, West Java being the largest. GKL is built on 28 ha of land and is strategically located near the planned LRT station as well as industrial estates. Recently, PPRO sealed a Rp3tn deal with Hyundai to develop apartment towers in Grand Kamala Lagoon. The JV expects to capture apartment demand from Korean expatriates working in industrial estates in Bekasi.

New Contract Win (Rp bn)

Total Order Book (Rp bn)

Blended gross margin (%)

Revenue Trend and Forecast

Net Income Trend and Forecast

Source: Company, AllianceDBS, DBS Vickers

19,584 20,240

26,792

29,956

33,660

0

4,200

8,400

12,600

16,800

21,000

25,200

29,400

33,600

2013A 2014A 2015F 2016F 2017F

35,454

42,518

56,659

71,217

84,941

0

17,300

34,600

51,900

69,200

86,500

2013A 2014A 2015F 2016F 2017F

10.9

12.313.1 13.2 13.3

0.0

2.7

5.4

8.2

10.9

13.6

2013A 2014A 2015F 2016F 2017F

0%

10%

20%

30%

40%

50%

-

5,000

10,000

15,000

20,000

25,000

30,000

2013A 2014A 2015F 2016F 2017F

Rp bn

Revenue (LHS) Growth y-o-y (RHS)

0%

10%

20%

30%

40%

-

200

400

600

800

1,000

1,200

1,400

2013A 2014A 2015F 2016F 2017F

Rp bn

Net income (LHS) Growth y-o-y (RHS)


Company Guide

PT PP (Persero)

Balance Sheet:

Strong balance sheet enables company to take up more projects. As of June 30, PTPP had Rp1.3tn net debt, bringing its net gearing ratio to 0.4x. The company has proposed a capital injection amounting to Rp2.25tn to the government next year which is expected to be disbursed after the parliament approves the revised state budget in 2016. Through a rights issue, PTPP could raise as much as Rp4.4tn cash from the government and minority shareholders. All of the proceeds will be used to fund PTPP’s equity investments in several infrastructure projects, including the Kuala Tanjung industrial estate, Kuala Tanjung multipurpose terminal and six sections of Jakarta inner city toll road. As most of the projects will only start in 2H16, the rights issue delay should not impact PTPP’s work plan. We also note that the company still has ample room for new borrowings if the rights issue is delayed further. Share Price Drivers:

Award of a large-sized, multi-year infrastructure contract. PTPP needs to secure Rp6tn new contracts to achieve its management’s target for FY15. New contract wins will be a positive catalyst to share price. Among the potential contract wins are construction works for subsidised, low-cost apartments (Rusunami) in Kemayoran, Jakarta. Faster execution of government’s infrastructure projects. Project execution had been slow in 1H15 with most parties pointing to the merger of Ministry of Public Works and Ministry of Housing and late budget approval as the main causes. We have seen an improvement in the last four months with Ministry of Public Works and Housing’s budget absorption and physical progress reaching 58% and 66% respectively in 10M15. If the improvement sustains, such encouraging news flow should affect PTPP’s share price positively. Key Risks:

Slowdown in property sector. PTPP’s exposure to the property sector has increased notably with EBIT contribution from Property & Realty segment reaching 39% in 1H15 vs. 8% in 1H14. In addition, building construction also dominates PTPP’s project portfolio with a 46% share in 10M15. A prolonged slowdown in the property market may pose risks to PTPP’s earnings and cash flows. Earnings dilution due to rights issue. PTPP has proposed to obtain a Rp2.25tn capital injection from the government next year. The company plans to hold rights issue amounting to Rp4.4tn in 2016 which represents 24% of its market capitalisation.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.9

1.0

1.0

1.1

1.1

1.2

1.2

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2013A 2014A 2015F 2016F 2017F


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

2013A 2014A 2015F 2016F 2017F


Rp

0.0%

5.0%

10.0%

15.0%

20.0%

2013A 2014A 2015F 2016F 2017F

Avg: 14.9x

+1sd: 20.8x

+2sd: 26.8x

‐1sd: 9x

‐2sd: 3x2.7

7.7

12.7

17.7

22.7

27.7


(x)

Avg: 3.91x

+1sd: 5.61x

+2sd: 7.31x

‐1sd: 2.21x

‐2sd: 0.51x0.4

1.4

2.4

3.4

4.4

5.4

6.4

7.4

8.4


(x)


Company Guide

PT PP (Persero)

COMPANY BACKGROUND

PT PP is Indonesia's leading construction company whose portfolio ranges from building and civil engineering to infrastructure construction. It has established a solid

reputation in the construction of high-rise buildings, which accounts for c.55% of its regular construction portfolio. Additionally, PTPP enjoys a c.40% market share in the seaport sector (company estimate).


Company Guide

PT PP (Persero)

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F New Contract Win (Rp bn) 19,584 20,240 26,792 29,956 33,660 Total Order Book (Rp bn) 35,454 42,518 56,659 71,217 84,941 Blended gross margin (%) 10.9 12.3 13.1 13.2 13.3 Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (Rp bn) Construction 9,952 10,662 13,135 17,059 20,763 Real Estate 259 645 1,520 1,925 2,258 Property 1,445 1,091 655 851 1,106 EPC 0 29 88 101 116 Total 11,656 12,427 15,398 19,936 24,243 Gross Profit (Rp bn) Construction 1,077 1,232 1,419 1,928 2,346 Real Estate 57 250 450 549 692 Property 139 143 75 98 127 EPC 0 (92) 70 56 64 Total 1,273 1,533 2,014 2,630 3,230 Gross Profit Margins (%) Construction 10.8 11.6 10.8 11.3 11.3 Real Estate 22.0 38.7 29.6 28.5 30.7 Property 9.6 13.1 11.5 11.5 11.5 EPC N/A (313.1) 80.0 55.0 55.0 Total 10.9 12.3 13.1 13.2 13.3 Income Statement (Rp bn)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 11,656 12,427 15,398 19,936 24,243 Cost of Goods Sold (10,383) (10,894) (13,384) (17,306) (21,013) Gross Profit 1,273 1,533 2,014 2,630 3,230 Other Opng (Exp)/Inc (200) (276) (297) (468) (566) Operating Profit 1,073 1,257 1,717 2,162 2,664 Other Non Opg (Exp)/Inc (148) (95) (117) (152) (184) Associates & JV Inc 96 72 54 62 72 Net Interest (Exp)/Inc (255) (315) (383) (441) (487) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 767 919 1,272 1,632 2,064 Tax (346) (387) (473) (608) (744) Minority Interest 0 0 (106) (127) (166) Preference Dividend 0 0 0 0 0 Net Profit 421 532 693 898 1,154 Net Profit before Except. 421 532 693 898 1,154 EBITDA 1,087 1,272 1,735 2,185 2,692 Growth Revenue Gth (%) 45.6 6.6 23.9 29.5 21.6 EBITDA Gth (%) 52.2 17.0 36.5 25.9 23.2 Opg Profit Gth (%) 51.0 17.1 36.6 25.9 23.2 Net Profit Gth (%) 35.9 26.4 30.2 29.6 28.5 Margins & Ratio Gross Margins (%) 10.9 12.3 13.1 13.2 13.3 Opg Profit Margin (%) 9.2 10.1 11.2 10.8 11.0 Net Profit Margin (%) 3.6 4.3 4.5 4.5 4.8 ROAE (%) 23.1 24.3 22.3 21.3 22.7 ROA (%) 4.0 3.9 4.2 4.4 4.7 ROCE (%) 13.2 12.8 14.8 15.1 16.4 Div Payout Ratio (%) 40.8 37.9 26.0 25.9 25.7 Net Interest Cover (x) 4.2 4.0 4.5 4.9 5.5


Expect a strong growth in FY15 as earnings contribution from PP Properti increases.


Company Guide

PT PP (Persero)


FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 3,205 4,619 1,982 3,240 3,553 Cost of Goods Sold (2,820) (4,009) (1,704) (2,834) (3,058) Gross Profit 385 611 278 405 495 Other Oper. (Exp)/Inc (47) (64) (86) (99) (101) Operating Profit 338 547 192 306 394 Other Non Opg (Exp)/Inc (22) (20) (20) (35) (28) Associates & JV Inc 27 30 3 7 12 Net Interest (Exp)/Inc (104) (167) (13) (57) (30) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 239 389 162 221 348 Tax (94) (148) (68) (104) (108) Minority Interest 0 0 0 (50) (22) Net Profit 144 241 94 67 217 Net profit bef Except. 144 241 94 67 217 EBITDA 343 556 175 278 378 Growth Revenue Gth (%) 23.1 44.1 (57.1) 63.5 9.7 EBITDA Gth (%) 67.3 62.4 (68.5) 58.5 36.0 Opg Profit Gth (%) 44.5 61.9 (64.9) 59.5 28.9 Net Profit Gth (%) 69.5 66.7 (61.2) (28.1) 223.2 Margins Gross Margins (%) 12.0 13.2 14.0 12.5 13.9 Opg Margins (%) 10.5 11.8 9.7 9.4 11.1 Net Profit Margins (%) 4.5 5.2 4.7 2.1 6.1 Balance Sheet (Rp bn)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 142 494 706 2,677 4,588 Invts in Associates & JVs 70 147 147 147 147 Other LT Assets 407 426 426 426 426 Cash & ST Invts 2,573 2,611 3,977 2,391 914 Inventory 1,777 2,675 3,296 4,261 5,174 Debtors 6,389 7,244 8,859 11,470 13,948 Other Current Assets 1,058 1,015 1,015 1,015 1,015 Total Assets 12,416 14,612 18,426 22,388 26,212 ST Debt 1,475 1,475 1,475 1,475 1,475 Creditor 6,300 7,022 8,788 11,364 13,798 Other Current Liab 1,001 1,342 1,342 1,342 1,342 LT Debt 813 1,455 1,955 2,455 2,705 Other LT Liabilities 842 928 928 928 928 Shareholder’s Equity 1,984 2,389 3,831 4,590 5,565 Minority Interests 1 1 107 234 399 Total Cap. & Liab. 12,416 14,612 18,426 22,388 26,212 Non-Cash Wkg. Capital 1,923 2,571 3,039 4,040 4,997 Net Cash/(Debt) 286 (319) 547 (1,538) (3,266) Debtors Turn (avg days) 167.7 200.2 190.9 186.1 191.3 Creditors Turn (avg days) 185.6 223.5 215.9 212.8 218.8 Inventory Turn (avg days) 58.8 74.7 81.5 79.8 82.1 Asset Turnover (x) 1.1 0.9 0.9 1.0 1.0 Current Ratio (x) 1.3 1.4 1.5 1.3 1.3 Quick Ratio (x) 1.0 1.0 1.1 1.0 0.9 Net Debt/Equity (X) CASH 0.1 CASH 0.3 0.5 Net Debt/Equity ex MI (X) CASH 0.1 CASH 0.3 0.6 Capex to Debt (%) 4.1 5.5 6.7 50.7 46.4 Z-Score (X) NA NA NA NA NA



Company Guide

PT PP (Persero)

Cash Flow Statement (Rp bn)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 767 919 1,272 1,632 2,064 Dep. & Amort. 14 15 18 23 28 Tax Paid (346) (387) (473) (608) (744) Assoc. & JV Inc/(loss) 0 0 0 0 0 Chg in Wkg.Cap. 55 (648) (469) (1,001) (957) Other Operating CF 161 384 0 0 0 Net Operating CF 651 282 348 47 391 Capital Exp.(net) (93) (160) (231) (1,994) (1,939) Other Invts.(net) (35) (192) 0 0 0 Invts in Assoc. & JV (106) (78) 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (129) (95) 0 0 0 Net Investing CF (363) (525) (231) (1,994) (1,939) Div Paid (93) (126) (160) (139) (180) Chg in Gross Debt 529 369 500 500 250 Capital Issues 0 0 909 0 0 Other Financing CF 223 0 0 0 0 Net Financing CF 659 243 1,249 361 70 Currency Adjustments 147 0 0 0 0 Chg in Cash 1,094 0 1,366 (1,585) (1,478) Opg CFPS (Rp) 123 192 169 216 278 Free CFPS (Rp) 115 25 24 (402) (320)



Source: AllianceDBS, DBS Vickers

S.No. Date Closing PriceTarget Price

Rating

1: 02 Jan 15 3590 3300 BUY

2: 26 Jan 15 3750 4650 BUY

3: 03 Mar 15 3980 4650 BUY

4: 04 May 15 3890 4650 BUY

5: 27 May 15 4010 4650 BUY


1

2 3

4

5

2940

3140

3340

3540

3740

3940

4140

4340

Dec-14 Apr-15 Aug-15 Dec-15

Rp

PTPP plans to acquire minority stakes in infrastructure assets, mainly ports, power plants and toll roads, to clinch the construction contracts.

ASIAN INSIGHTS VICKERS SECURITIES www.dbsvickers.com ed: TH / sa: MA

HOLD Last Traded Price: Rp2,850 (JCI : 4,585.55) Price Target: Rp2,850 (0%) (Prev Rp3,000) Potential Catalyst: Award of large-sized contracts Where we differ: Our FY15F net profit is 5% below consensus Analyst Tjen San Chong +603 2604 3972 [email protected] Tiesha Putri +6221 30034931 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2014A 2015F 2016F 2017F

Revenue 12,463 13,799 19,138 27,063 EBITDA 1,399 1,487 2,050 2,634 Pre-tax Profit 1,146 1,133 1,536 1,916 Net Profit 615 602 796 977 Net Pft (Pre Ex.) 615 602 796 977 EPS (Rp) 100 97.9 130 159 EPS Pre Ex. (Rp) 100 97.9 130 159 EPS Gth (%) 8 (2) 32 23 EPS Gth Pre Ex (%) 8 (2) 32 23 Diluted EPS (Rp) 100 97.9 130 159 Net DPS (Rp) 27.8 20.0 19.6 25.9 BV Per Share (Rp) 649 727 837 970 PE (X) 28.5 29.1 22.0 17.9 PE Pre Ex. (X) 28.5 29.1 22.0 17.9 P/Cash Flow (X) nm 27.3 50.1 51.7 EV/EBITDA (X) 13.7 13.4 10.4 9.0 Net Div Yield (%) 1.0 0.7 0.7 0.9 P/Book Value (X) 4.4 3.9 3.4 2.9 Net Debt/Equity (X) 0.1 0.2 0.4 0.6 ROAE (%) 17.7 14.2 16.6 17.6 Earnings Rev (%): (7) (2) 2 Consensus EPS (Rp): 99.7 134 172

Other Broker Recs: B: 14 S: 2 H: 11

Source of all data: Company, AllianceDBS, DBS Vickers,

Bloomberg Finance L.P

Building For Future Growth

Maintain HOLD. We cut our FY15F/FY16F earnings by 7%/2% after imputing lower earnings estimates for WIKA’s precast business. Post rights issue, WIKA will have a larger capacity to carry out the government’s infrastructure mega projects. However, we believe the current valuation at 22x FY16F PE is fair and we would like to see better earnings delivery and further order book replenishment before changing our view. We maintain our HOLD call with a revised TP of Rp2,850.

Build now, reap cash later. WIKA expects to secure an additional order book of Rp30tn over 2016-2019 from the high-speed railway construction work. However, the company charges a modest margin with gross margin at only 6% (vs. normal range of 8-10%) to minimize the investment needed. We also note that the profit will be re-invested into the JV to fund part of the equity investment requirement. While the railway investment is expected to generate 9% pretax IRR over 40 years, the company may have to endure negative cash flows in the initial years of operations before it can start to enjoy recurring profit. The consortium is relying on the transit-oriented development (TOD) to compensate for this but few details have been released as the TOD is still in the planning phase.

Slow contract wins as expected. WIKA won Rp17.5tn of new contracts in 10M15, representing 73% of our full-year forecasts. This achievement is still far behind management’s target (55% of FY15 target). However, the company is still maintaining its FY15 target at Rp31.6tn on hope of a faster tender process leading to year-end. Valuation:

We lower our TP slightly to Rp2,850, still based on 22x FY16F EPS (at +1SD of historical mean PE). Key Risks to Our View:

Delay in project rollout. Delay in project rollout, especially the mega high-speed railway project, should lead to lower-than-expected revenue and earnings. At A Glance Issued Capital (m shrs) 6,149 Mkt. Cap (Rpbn/US$m) 17,525 / 1,282 Major Shareholders Republic of Indonesia (%) 65.2 Free Float (%) 33.8 3m Avg. Daily Val (US$m) 2.1 ICB Industry : Industrials / Construction & Materials

DBS Group Research . Equity 25 Nov 2015


Wijaya Karya Edition 1 Version 1 | Bloomberg: WIKA IJ | Reuters: WIKA.JK Refer to important disclosures at the end of this report

87

187

287

387

487

587

423.0

923.0

1,423.0

1,923.0

2,423.0

2,923.0

3,423.0

3,923.0

Nov-11 Nov-12 Nov-13 Nov-14 Nov-15

Relative IndexRp

Wijaya Karya (LHS) Relative JCI INDEX (RHS)


Company Guide

Wijaya Karya


2015 2016


Revenue (Rp bn) 14,816 13,799 -7% 18,823 19,138 2%

Gross profit (Rp bn) 1,605 1,465 -9% 2,002 1,963 -2%

EBIT (Rp bn) 1,133 1,009 -11% 1,401 1,423 2%

Net profit (Rp bn) 649 602 -7% 809 796 -2%

Gross margin (%) 10.8 10.6 10.6 10.3 EBIT margin (%) 7.6 7.3 7.4 7.4 Net margin (%) 4.4 4.4 4.3 4.2

New contract win 23,939 23,939 0% 31,447 58,155 85% Total order book 52,700 53,717 2% 65,323 95,234 46%

Source : Company, AllianceDBS, DBS Vickers Infrastructure projects funded by rights issue

Investment (Rp bn)

Capital structure WIKA’s portion

Debt Equity Stake Equity investment

Projects funded by government

Kuala Tanjung industrial estate 8,000 70% 30% 20% 480

Jawa 5 power plant 37,500 72% 28% 15% 1,600

Aceh power plant 10,000 70% 30% 40% 1,200

Soreang-Pasir Koja toll road 1,500 70% 30% 25% 113

Manado-Bitung toll road 3,300 70% 30% 20% 198

Samarinda-Balikpapan toll road 8,300 70% 30% 10% 252

Jatiluhur water treatment 2,000 70% 30% 14% 84

Sub-total 70,600 3,927

Projects funded by public

Jakarta-Bandung high-speed railway 74,250 75% 25% 23% 4,232

Total 144,850

8,159



Company Guide

Wijaya Karya


Earnings Drivers:

Expect larger wins in 4Q15. The management remains optimistic on achieving its new contract target of Rp31.6tn this year. The progress had been slow up to October with contract wins at only Rp17.5tn or 55% of management’s target. Nevertheless, this is in line with our forecast (73% of FY15F) as we assumed 24% lower contract wins than management’s guidance for this year. Among the potential wins are Sorong port project worth Rp2.3tn and oil & gas project worth US$300m.

Asset owner cum contractor. WIKA will venture into eight infrastructure projects worth Rp145tn. Among the largest projects are Jakarta-Bandung high-speed railway (Rp74tn), Java 5 power plant (Rp37.5tn), Aceh power plant (Rp10tn) and Samarinda-Balikpapan toll road (Rp8.3tn). In the high-speed railway project, the company will have to inject Rp4.2tn cash to fund its equity investment portion. This will be funded by rights issue proceeds from the public (Rp1tn), while the balance will be funded by debt, including the issuance of Rp1tn global bond, and the profits from related construction works.

WIKA’s equity investment in the remaining seven projects will be fully funded by the government. WIKA has proposed to obtain a Rp4tn capital injection from the government next year. With the project capital structure of 30% equity and 70% debt and WIKA’s minority ownership ranging from 10-40%, the government's capital injection will be more than sufficient to fund WIKA’s Rp3.9tn equity investment. Meanwhile, the debt will likely be issued on the associates & JV level.

Being the owner of these assets, WIKA should have an advantage in the construction tender process. Based on our estimates, if WIKA wins at least 50% of the construction contracts ex high-speed railway, the company should be able to secure Rp12.9tn for its order book over the next 3-4 years. If we include the construction work for high-speed railway, the total order book should top Rp42.9tn which is equal to 3.1x FY15F revenue. We have yet to factor in the earnings accretion from the seven infrastructure assets funded by the government as the capital injection is now being frozen by the parliament.

Measuring the potential earnings dilution. To calculate the dilution effect, we removed the potential revenue from the high-speed railway project, which we had already incorporated into our base-case earnings forecasts. Assuming an Rp16.6tn addition to order book, 30% of which will be recognised as revenue in FY16F with 2% net margin, we expect the rights issue proceeds to add a net profit of Rp100bn or 12% upside to our FY16F base case. If the exercise price is set at a 5-10% discount to current price (Rp2,850), the potential dilution to EPS will be 17-19%. Note that we have yet to include the NPV generated by WIKA’s investment in the related infrastructure assets.

Relying on TOD to cover up medium-term earnings risk. For the high-speed railway project, the JV will rely on the TOD to cover the negative cash flows in the early years of operations. The TOD is currently still in the planning phase with the help of experts from Singapore. The plan is to build TOD in four

areas, i.e. Halim Perdanakusuma (East Jakarta), Karawang (West Java), Walini (West Java) and Gedebage (Bandung, West Java). There is also talk on offering the project to private developers.

Building recurring revenue stream through IPP. WIKA has been actively looking to shift toward a more recurring revenue model. One of the strategies is to participate in Independent Power Producer (IPP) projects. Currently, WIKA has some stakes in Tampomas (West Java) and Rengat (Riau) power plants. The company is also bidding for eight power plant projects in Java and Sumatera with a total capacity of 6,837 MW.

New contract wins (Rp bn)

Total order book (Rp bn)

Revenue trend and forecasts

Net income trend and forecasts


17,732 17,774

23,939

58,155

33,796

0

7,300

14,600

21,900

29,200

36,500

43,800

51,100

58,400

2013A 2014A 2015F 2016F 2017F

38,26743,577

53,717

95,234

81,967

0

19,400

38,800

58,200

77,600

97,000

2013A 2014A 2015F 2016F 2017F

0%

10%

20%

30%

40%

-

5,000

10,000

15,000

20,000

25,000

2013A 2014A 2015F 2016F 2017F

Rp bn

Revenue (LHS) Growth y-o-y (RHS)

-10%

0%

10%

20%

30%

40%

-

200

400

600

800

1,000

1,200

2013A 2014A 2015F 2016F 2017F

Rp bn

Net income (LHS) Growth y-o-y (RHS)


Company Guide

Wijaya Karya

Balance Sheet:

Stronger balance sheet post rights issue. WIKA is scheduled to receive a Rp4tn capital injection from the government in 2016. The company also plans to conduct a rights issue, enabling it to receive additional capital of Rp2.1tn from public. The combined Rp6.1tn proceeds will be allocated to several projects, among which are power plants and high-speed railway. With the additional equity base, WIKA should have a larger balance sheet capacity to take up more mega projects in the future. We have yet to incorporate the rights issue proceeds into our model as the plan is now hanging in the balance after the parliament decided to freeze the government's capital injection. Both the government and management remain optimistic that the capital injection would eventually be disbursed after the parliament approves the revised state budget in 1H16. The company is now looking for a bridging loan to carry on the planned projects while waiting for the rights issue execution next year. Listing of WIKA Gedung. WIKA also plans to divest up to 30% stake in its subsidiary, WIKA Gedung, through an IPO in 2H16. The IPO is expected to free up Rp1tn cash for future expansion. Meanwhile, the IPO of WIKA Realty is further delayed as WIKA plans to grow the subsidiary before the IPO.. Share Price Drivers:

Award of large-sized infrastructure contract. Award of a large-sized, multi-year contract should increase WIKA’s revenue visibility in the future. Among the mega projects eyed by WIKA are steam power plants 5 and 7 in Java. Faster roll-out of government’s infrastructure projects. If the government manages to eliminate red tape and speed up the execution of infrastructure development plan, WIKA’s share price may re-rate upward. Key Risks:

Delay in infrastructure project execution. 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 cash flow generation in the medium term. Aside from being the contractor, WIKA typically owns some stakes in the assets being built. This exposes WIKA to the risk of deteriorating cash flow generation as such a business model requires high capital investment and normally generates negative cash flow in the early years of operations.

Earnings dilution due to rights issue. The company plans to hold a rights issue to raise additional capital of Rp6.1tn in June 2016. The targeted proceeds represent 35% of its current market capitalisation. Company background

Wijaya Karya is a construction company with interests in EPC, civil, building works, precast and realty.


Capital Expenditure (Rp bn)

ROE (%)

Forward PE Band (x)

PB Band (x)


0.8

0.9

0.9

1.0

1.0

1.1

1.1

1.2

1.2

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2013A 2014A 2015F 2016F 2017F


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

2013A 2014A 2015F 2016F 2017F


Rp

0.0%

5.0%

10.0%

15.0%

20.0%

2013A 2014A 2015F 2016F 2017F

Avg: 19.8x

+1sd: 26.3x

+2sd: 32.8x

‐1sd: 13.3x

‐2sd: 6.8x5.5

10.5

15.5

20.5

25.5

30.5

35.5

40.5


(x)

Avg: 3.92x

+1sd: 4.96x

+2sd: 6x

‐1sd: 2.89x

‐2sd: 1.85x

1.2

2.2

3.2

4.2

5.2

6.2


(x)


Company Guide

Wijaya Karya

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F New contract wins (Rp bn) 17,732 17,774 23,939 58,155 33,796 Total order book (Rp bn) 38,267 43,577 53,717 95,234 81,967

Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (Rpbn) Construction 5,077 4,731 6,936 9,838 14,477 EPC 2,877 3,178 2,449 3,398 4,676 Industrial (Precast) 2,811 3,271 2,904 4,140 5,826 Property 1,119 1,283 1,510 1,762 2,084 Total 11,885 12,463 13,799 19,138 27,063 PBT (Rpbn)

Construction 420 371 569 752 967 EPC 247 273 245 340 468 Industrial (Precast) 466 544 380 554 680 Property 190 237 272 317 375 Total 1,322 1,425 1,465 1,963 2,490 PBT Margins (%)

Construction 8.3 7.8 8.2 7.6 6.7 EPC 8.6 8.6 10.0 10.0 10.0 Industrial (Precast) 16.6 16.6 13.1 13.4 11.7 Property 17.0 18.4 18.0 18.0 18.0 Total 11.1 11.4 10.6 10.3 9.2

Income Statement (Rpbn)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 11,885 12,463 13,799 19,138 27,063 Cost of Goods Sold (10,562) (11,039) (12,333) (17,176) (24,574) Gross Profit 1,322 1,425 1,465 1,963 2,490 Other Opng (Exp)/Inc (367) (393) (456) (539) (679) Operating Profit 955 1,031 1,009 1,423 1,810 Other Non Opg (Exp)/Inc (159) (124) (149) (179) (215) Associates & JV Inc 261 363 417 521 651 Net Interest (Exp)/Inc (39.9) (124) (144) (229) (331) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 1,017 1,146 1,133 1,536 1,916 Tax (392) (395) (438) (597) (766) Minority Interest (54.4) (136) (93.6) (143) (173) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 570 615 602 796 977 Net Profit before Except. 570 615 602 796 977 EBITDA 1,150 1,399 1,487 2,050 2,634 Growth Revenue Gth (%) 20.0 4.9 10.7 38.7 41.4 EBITDA Gth (%) 24.3 21.7 6.3 37.8 28.5 Opg Profit Gth (%) 42.0 8.0 (2.1) 41.1 27.2 Net Profit Gth (Pre-ex) (%) 19.7 7.9 (2.2) 32.4 22.7

Margins & Ratio Gross Margins (%) 11.1 11.4 10.6 10.3 9.2 Opg Profit Margin (%) 8.0 8.3 7.3 7.4 6.7 Net Profit Margin (%) 4.8 4.9 4.4 4.2 3.6 ROAE (%) 20.6 17.7 14.2 16.6 17.6 ROA (%) 4.8 4.3 3.5 4.0 4.0 ROCE (%) 11.2 9.1 6.3 7.7 8.2 Div Payout Ratio (%) 26.5 27.8 20.5 15.1 16.3 Net Interest Cover (x) 23.9 8.3 7.0 6.2 5.5


Revenue growth should accelerate after the nomenclature issue within the Ministry of Public Works and Housing was resolved.

High-speed railway construction work is expected to add Rp30tn to WIKA’s order book in FY16F.


Company Guide

Wijaya Karya


FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 2,752 3,858 2,005 2,773 3,313 Cost of Goods Sold (2,482) (3,373) (1,821) (2,462) (2,830) Gross Profit 271 485 185 311 483 Other Oper. (Exp)/Inc (104) (112) (82.3) (102) (104) Operating Profit 167 373 103 209 379 Other Non Opg (Exp)/Inc (2.6) (91.5) 17.5 (17.3) (7.1) Associates & JV Inc 72.2 202 47.6 50.3 73.1 Net Interest (Exp)/Inc (22.3) (82.8) (53.0) (10.2) (150) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 214 401 115 232 295 Tax (77.6) (135) (48.0) (78.9) (93.6) Minority Interest (18.3) (51.8) (5.1) (14.3) (11.1) Net Profit 118 214 61.5 139 190 Net profit bef Except. 118 214 61.5 139 190 EBITDA 236 484 168 242 445 Growth Revenue Gth (%) (10.1) 40.2 (48.0) 38.3 19.5 EBITDA Gth (%) (14.2) 104.7 (65.3) 44.6 83.5 Opg Profit Gth (%) (36.0) 124.0 (72.5) 104.3 80.9 Net Profit Gth (Pre-ex) (%) 2.5 81.7 (71.3) 125.9 36.7 Margins Gross Margins (%) 9.8 12.6 9.2 11.2 14.6 Opg Profit Margins (%) 6.1 9.7 5.1 7.6 11.4 Net Profit Margins (%) 4.3 5.6 3.1 5.0 5.7

Balance Sheet (Rpbn)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 1,640 2,676 3,611 4,915 6,774 Invts in Associates & JVs 1,548 1,908 2,325 2,846 3,497 Other LT Assets 1,412 1,816 1,816 1,816 1,816 Cash & ST Invts 1,421 2,334 2,508 1,943 999 Inventory 1,118 817 908 1,265 1,812 Debtors 3,509 4,416 4,915 6,816 9,639 Other Current Assets 1,945 1,947 2,045 2,147 2,254 Total Assets 12,595 15,915 18,127 21,749 26,791 ST Debt

402 1,691 1,691 1,691 1,691 Creditor 3,089 3,903 4,337 6,043 8,653 Other Current Liab 3,808 2,882 3,286 3,588 3,907 LT Debt 1,271 1,324 2,125 2,920 4,043 Other LT Liabilities 799 1,137 1,137 1,137 1,137 Shareholder’s Equity 2,949 3,990 4,468 5,144 5,962 Minority Interests 278 989 1,083 1,226 1,399 Total Cap. & Liab. 12,595 15,915 18,127 21,749 26,791 Non-Cash Wkg. Capital (324) 395 245 598 1,146 Net Cash/(Debt) (251) (681) (1,309) (2,668) (4,735) Debtors Turn (avg days) 74.6 116.0 123.4 111.9 111.0 Creditors Turn (avg days) 98.4 117.0 124.0 112.1 110.9 Inventory Turn (avg days) 39.4 32.4 26.0 23.5 23.2 Asset Turnover (x) 1.0 0.9 0.8 1.0 1.1 Current Ratio (x) 1.1 1.1 1.1 1.1 1.0 Quick Ratio (x) 0.7 0.8 0.8 0.8 0.7 Net Debt/Equity (X) 0.1 0.1 0.2 0.4 0.6 Net Debt/Equity ex MI (X) 0.1 0.2 0.3 0.5 0.8 Capex to Debt (%) 36.1 34.4 30.0 34.5 39.2



Company Guide

Wijaya Karya

Cash Flow Statement (Rpbn)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 1,017 1,146 1,133 1,536 1,916 Dep. & Amort. 93.2 129 211 284 387 Tax Paid (184) (370) (169) (438) (597) Assoc. & JV Inc/(loss) (261) (363) (417) (521) (651) Chg in Wkg.Cap. (180) (663) (118) (513) (717) Other Operating CF (195) (56.7) 0.0 0.0 0.0 Net Operating CF 289 (178) 640 350 339 Capital Exp.(net) (605) (1,036) (1,145) (1,588) (2,246) Other Invts.(net) (16.8) (316) 0.0 0.0 0.0 Invts in Assoc. & JV (93.2) (48.6) 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 94.7 132 0.0 0.0 0.0 Net Investing CF (620) (1,268) (1,145) (1,588) (2,246) Div Paid (151) (171) (123) (120) (159) Chg in Gross Debt 417 1,359 802 794 1,123 Capital Issues (22.6) 448 0.0 0.0 0.0 Other Financing CF (58.3) 724 0.0 0.0 0.0 Net Financing CF 185 2,360 679 674 964 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (145) 914 174 (565) (944) Opg CFPS (Rp) 76.5 79.0 123 140 172 Free CFPS (Rp) (51.4) (198) (82.2) (202) (311)

Source: Company, AllianceDBS. DBS Vickers



S.No. DateClosing

PriceTarget Price

Rat ing

1: 02 Jan 15 3675 3200 HOLD

2: 26 Jan 15 3550 4050 BUY

3: 18 Mar 15 3530 4000 BUY

4: 04 May 15 2975 3000 HOLD

5: 27 May 15 3175 3000 HOLD

6: 10 Aug 15 2650 3000 HOLD


12

3

4

5

6

2337

2537

2737

2937

3137

3337

3537

3737

3937

Nov-14 Mar-15 Jul-15 Nov-15

Rp

ASIAN INSIGHTS VICKERS SECURITIES www.dbsvickers.com ed: TH / sa: MA

HOLD (Downgrade from BUY)

Last Traded Price: Rp920 (JCI : 4,585.55) Price Target: Rp1,000 (9% upside) (Prev Rp1,200) Potential Catalyst: Additional contract win from high-speed railway project. Where we differ: We have factored in potential revenue from high-speed railway project into our FY16F and FY17F earnings. Analyst Tjen San Chong +603 2604 3972 [email protected] Tiesha Putri +6221 30034931 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Rp bn) 2014A 2015F 2016F 2017F Revenue 3,277 2,904 4,148 5,836 EBITDA 490 374 552 762 Pre-tax Profit 412 297 462 640 Net Profit 329 227 349 479 Net Pft (Pre Ex.) 329 227 349 479 Net Pft (ex. BA gains) N/A N/A N/A N/A EPS (Rp) 38 26 40 55 EPS Pre Ex. (Rp) 38 26 40 55 EPS Gth (%) 4 (31) 54 37 EPS Gth Pre Ex (%) 4 (31) 54 37 Diluted EPS (Rp) 38 26 40 55 Net DPS (Rp) 11 11 8 12 BV Per Share (Rp) 246 261 293 336 PE (X) 24.4 35.4 23.0 16.7 PE Pre Ex. (X) 24.4 35.4 23.0 16.7 P/Cash Flow (X) 41.8 14.6 14.2 12.4 EV/EBITDA (X) 15.5 20.1 13.6 10.2 Net Div Yield (%) 1.2 1.2 0.8 1.3 P/Book Value (X) 3.7 3.5 3.1 2.7 Net Debt/Equity (X) CASH CASH CASH CASH

ROAE (%) 23.3 10.3 14.5 17.5

Earnings Rev (%): (31) (17) (5) Consensus EPS (Rp): 29 39 48 Other Broker Recs: B: 5 S: 3 H: 5

Source of all data: Company, AllianceDBS, DBS Vickers, Bloomberg Finance L.P

Riding On A Fast Train

Downgrade to HOLD We cut FY15F/16F earnings by 31%/17% after taking into account the lower-than-expected earnings in 1H15. Consequently, we lower our TP to Rp1,000 and downgrade our call to HOLD. While 9M15 contract wins of Rp2.2tn is on track to achieve the Rp3.4tn target, most of the orders were only received after July. Hence, WTON has limited time remaining to deliver them this year. We would turn more positive on the stock once there is more significant progress on the high-speed railway construction. If the JV is able to execute the project in a timely manner, WTON’s revenue visibility should improve, allowing its valuation to re-rate.

Utilisation rate picked up in 3Q15. WTON saw its factory utilisation rate improved to 80% of normal capacity in 3Q15 from only 70% in 2Q15. After a lacklustre semester in 1H15 where it suffered from operating deleverage, we believe WTON’s earnings will pick up along with the improving execution of government’s infrastructure development plan.

A clear beneficiary of high-speed railway. WIKA was recently appointed to lead a consortium of state-run companies to build the Jakarta-Bandung high-speed railway. To support its parent company, WTON will supply the precast needs for the elevated track which is estimated to reach 3.5m tons or Rp7–8tn over the next three years. The project should occupy 99% of WTON’s current installed capacity in West Java and 51% of its nationwide capacity. There could also be an upside to the contract value if WTON is able to supply the precast for the railway tunnel. Valuation:

We revised down our TP to Rp1,000, still based on 25x FY16F EPS (at historical mean PE multiple). Key Risks to Our View:

Delay in government’s infrastructure project rollout. Demand for precast is heavily dependent on the execution of government’s infrastructure development plan. At A Glance Issued Capital (m shrs) 8,715 Mkt. Cap (Rpbn/US$m) 8,018 / 588 Major Shareholders Wijaya Karya (%) 60.0 KKMS (%) 11.2 Free Float (%) 28.8 3m Avg. Daily Val (US$m) 1.3 ICB Industry : Industrials / Construction & Materials

DBS Group Research . Equity 25 Nov 2015


Wijaya Karya Beton Edition 1 Version 1 | Bloomberg: WTON IJ | Reuters: WTON.JK Refer to important disclosures at the end of this report

89

109

129

149

169

189

209

229

531.0

731.0

931.0

1,131.0

1,331.0

1,531.0

Apr-14 Sep-14 Feb-15 Jul-15

Relative IndexRp

Wijaya Karya Beton (LHS) Relative JCI INDEX (RHS)


Company Guide

Wijaya Karya Beton

WHAT’S NEW


We cut our FY15F and FY16F earnings by 31% and 17% respectively to factor in the weak performance in 1H15 and lower-than-expected contract wins YTD. We now expect 2H15 revenue to double on sequential basis as government speeds up the infrastructure development execution.

Despite the cut, we believe demand for precast should recover next year as more mega projects are launched and the existing ones, such as MRT and LRT, progress. Therefore, we assumed a sales growth of 43% y-o-y for WTON in FY16F after dropping 11% y-o-y in FY15F. These factors in lower utilisation rates of 60%/75% in FY15F/FY16F vs. 79%/89% previously.

We acknowledge that there could be upside to our FY16F revenue and earnings if the Jakarta-Bandung high-speed railway project starts earlier than our expectation. We assume that WTON will start to recognise revenue from railway project in 4Q16, therefore the large chunk of the revenue will only be booked in 2017-2018.

On the EBIT margins, we lower our FY15F after taking into account the margin decline in 1H15. For FY16F, we see a possibility of a slight margin expansion aided by better utilisation rate and economies of scale. Based on our sensitivity analysis, every 50-bp margin expansion from our base assumption will lead to a 4.6% increase to our FY16F earnings.


2015 2016


Revenue (Rp bn) 3,921 2,904 -26% 5,175 4,148 -20%

Gross profit (Rp bn) 509 380 -25% 661 556 -16%

EBIT (Rp bn) 431 302 -30% 558 465 -17%

EBITDA (Rp bn) 552 374 -32% 695 551 -21%

Net profit (Rp bn) 328 227 -31% 418 349 -17%

Gross margin (%) 13.0 13.1

12.8 13.4

EBIT margin (%) 11.0 10.4

10.8 11.2

EBITDA margin (%) 14.1 12.9

13.4 13.3

Net margin (%) 8.4 7.8

8.1 8.4

Sales volume (‘000 tons) 1,811 1,386 -23% 2,174 1,868 -14%

Utilization rate (sales volume/installed capacity) (%)

79 60

87 75



Company Guide

Wijaya Karya Beton


Earnings Drivers:

Demand recovery in sight. After the nomenclature issue in Ministry of Public Works and Housing (MoPWH) was resolved, we have seen an improvement in infrastructure development progress with physical progress of projects under the MoPWH jumping to 57.9% at the end of October vs. a mere 12.2% at the end of June. Additionally, in an attempt to accelerate the progress, the ministry has conducted early tenders for projects funded by 2016 budget. This should help to accelerate budget absorption and physical progress next year and translate into higher precast order for WTON. Award of high-speed railway contract should improve order book visibility. WTON has recently agreed to support its parent company, Wijaya Karya, to supply precast to Jakarta-Bandung high-speed railway project. The company estimated that the 70-km elevated track requires 3.5m tons of precast in 2016-2018 or roughly 1.17m tons p.a. If the project execution runs smoothly and WTON could increase its capacity on time to meet the demand, it should secure an additional annual sales of Rp2.3–2.7tn over the next three years. We expect this project to contribute 15%/46% of consolidated revenue in FY16F/FY17F. Currently, WTON has an installed capacity of 1.18m tons per annum in West Java. The company claimed that it can boost this capacity up to 40% to 1.65m tons p.a. by adding one more shift per day from two shifts currently. We note that there could be an upside to the contract value if WTON is able to supply the precast needs for rail pads and the planned 20-km long tunnel.

First-mover advantage in ex Java market. WTON has continued to expand its coverage to markets outside Java where competitors are scarce. In these areas, the company often serves as the only large-scale precast producer, allowing it to maintain higher pricing and margins compared to those in Java. Based on our channel check, WTON’s state-run competitors will still be focusing on expanding in the Java market in the near future. Therefore, we are confident that WTON’s position outside Java markets will remain firm. The rollout of toll roads and port projects outside Java should benefit WTON as the most ready producer to fulfil the precast needs.

Gross profit margin (%)

Sales volume ('000 tons)

Utilization rate (%)

Railway’s forecasted precast needs

vs. WTON’s capacity


14.7 14.9

13.1 13.4 13

0.0

1.9

3.8

5.6

7.5

9.4

11.3

13.1

15.0

2013A 2014A 2015F 2016F 2017F

1,457 1,4641,386

1,868

2,532

0

500

1,000

1,500

2,000

2,500

2013A 2014A 2015F 2016F 2017F

72.8

66.560.3

74.7

84.4

0.0

17.2

34.4

51.6

68.9

86.1

2013A 2014A 2015F 2016F 2017F

1,167 1,167 1,167

2,500

3,000 3,300

-

500

1,000

1,500

2,000

2,500

3,000

3,500

2016F 2017F 2018F

Medium-speed railway ('000 tons) Capacity ('000 tons)


Company Guide

Wijaya Karya Beton

Balance Sheet:

Robust balance sheet to fund expansion plan. We expect WTON to maintain its net cash position over the next two years. To fund the increasing working capital needs, the company plans to sell its treasury stocks to the public next year. The planned expansion over the next two years will boost capacity to 3m tons but should be adequately funded by internally generated funds. Assuming the treasury stocks are sold at Rp1,000/share, the proceeds raised would be Rp377bn. Share Price Drivers:

Award of large-sized, multi-year contracts. WTON needs to secure Rp1.2tn of new contracts in 4Q15 order to meet this year’s target of Rp3.4tn. One of the large-sized infrastructure projects that WTON is bidding for is the LRT. LRT’s main contractor, Adhi Karya, does not have the capacity to supply the entire precast needs, hence part of the order will be passed to WTON. The total precast need of this project is estimated to be around Rp3.6tn over the next three years. More certainty regarding the Jakarta-Bandung high-speed railway construction should also support valuation re-rating, in our view. Faster rollout of government’s infrastructure project. We have seen a pickup in infrastructure spending after the budget and nomenclature issue within the Ministry of Public Works and Housing was resolved. If this improvement sustains, we believe such encouraging newsflow will affect WTON’s share price positively. Key Risks:

Delay in infrastructure project execution. Delay in infrastructure project execution will cause WTON’s revenue to fall short of expectation. This may also lower WTON’s profitability given its high operating leverage. Increasing competition in 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 1H15, Java contributed to 48% and 45% of WTON’s consolidated revenue and earnings respectively. Bulk of COGS is in USD. Steel and cement make up 30% and 20% of WTON’s COGS respectively. Additionally, some overhead costs for its production facilities are also in USD, which exposes WTON’s profitability to currency fluctuations. Nevertheless, the company has mitigated this risk by signing umbrella contracts for its key raw materials, enabling it to lock in prices for three months. Company Background

PT Wijaya Karya Beton Tbk (WTON) is the dominant market leader in precast concrete with c.40% market share. It is a subsidiary of PT Wijaya Karya Tbk (WIKA), an SOE construction company. WTON was listed in April 2014, following which WIKA's ownership fell to 60% (from 78.4% pre-IPO).


Capital Expenditure (Rp m)

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.8

0.8

0.9

0.9

1.0

1.0

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2013A 2014A 2015F 2016F 2017F


0.0

100,000.0

200,000.0

300,000.0

400,000.0

500,000.0

600,000.0

700,000.0

800,000.0

900,000.0

2013A 2014A 2015F 2016F 2017F


Rp

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2013A 2014A 2015F 2016F 2017F

Avg: 28.9x

+1sd: 37.8x

+2sd: 46.8x

‐1sd: 20x

‐2sd: 11.1x9.9

14.9

19.9

24.9

29.9

34.9

39.9

44.9

49.9

54.9


(x)

Avg: 4.71x

+1sd: 5.37x

+2sd: 6.04x

‐1sd: 4.04x

‐2sd: 3.38x

2.7

3.2

3.7

4.2

4.7

5.2

5.7

6.2

6.7


(x)


Company Guide

Wijaya Karya Beton

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Gross profit margin (%) 14.7 14.9 13.1 13.4 13.0 Sales volume ('000 tons) 1,457 1,464 1,386 1,868 2,532 Utilization rate (%) 72.8 66.5 60.3 74.7 84.4 Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (Rp bn) Concrete 2,622 3,228 2,871 4,101 5,780 Service 22 50 33 47 55 Head office 0 0 0 0 0 Total 2,644 3,277 2,904 4,148 5,836 Income Statement (Rp bn)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 2,644 3,277 2,904 4,148 5,836 Cost of Goods Sold (2,256) (2,790) (2,524) (3,592) (5,077) Gross Profit 388 487 380 556 759 Other Opng (Exp)/Inc (52) (78) (78) (91) (105) Operating Profit 336 409 302 465 654 Other Non Opg (Exp)/Inc (4) (3) 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (4) 6 (5) (4) (15) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 329 412 297 462 640 Tax (87) (89) (74) (115) (160) Minority Interest 2 6 4 3 0 Preference Dividend 0 0 0 0 0 Net Profit 243 329 227 349 479 Net Profit before Except. 243 329 227 350 480 EBITDA 393 490 374 552 762 Growth Revenue Gth (%) 30.2 24.0 (11.4) 42.8 40.7 EBITDA Gth (%) 42.3 24.8 (23.7) 47.5 38.1 Opg Profit Gth (%) 45.4 21.6 (26.3) 54.1 40.6 Net Profit Gth (%) 35.7 35.3 (31.0) 53.9 37.4 Margins & Ratio Gross Margins (%) 14.7 14.9 13.1 13.4 13.0 Opg Profit Margin (%) 12.7 12.5 10.4 11.2 11.2 Net Profit Margin (%) 9.2 10.0 7.8 8.4 8.2 ROAE (%) 39.2 23.3 10.3 14.5 17.5 ROA (%) 9.1 9.8 5.5 7.0 7.6 ROCE (%) 25.5 15.4 8.2 12.2 14.9 Div Payout Ratio (%) 8.2 30.0 43.5 19.5 21.8 Net Interest Cover (x) 92.9 NM 61.2 113.1 44.8


We expect revenue to recover next year as nomenclature issue in Ministry of Public Work and Housing was resolved.

Better utilisation rate should translate into EBIT margin expansion due to WTON’s high operating leverage.


Company Guide

Wijaya Karya Beton


FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 644 955 428 464 657 Cost of Goods Sold (564) (805) (393) (383) (583) Gross Profit 80 150 34 81 74 Other Oper. (Exp)/Inc (18) (24) (18) (22) (21) Operating Profit 62 125 16 59 54 Other Non Opg (Exp)/Inc (5) 2 (2) (3) 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc 5 0 3 (9) (10) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 62 128 17 46 43 Tax (13) (25) (2) (10) (10) Minority Interest 1 2 2 0 1 Net Profit 51 105 17 37 34 Net profit bef Except. 51 105 17 37 34 EBITDA 57 127 14 55 54 Growth Revenue Gth (%) (25.5) 48.2 (55.2) 8.5 41.8 EBITDA Gth (%) (47.1) 123.4 (88.9) 291.2 (2.9) Opg Profit Gth (%) (42.3) 102.1 (87.1) 262.6 (8.7) Net Profit Gth (%) (44.7) 106.4 (83.8) 114.7 (6.3) Margins Gross Margins (%) 12.4 15.7 8.0 17.4 11.3 Opg Margins (%) 9.6 13.1 3.8 12.7 8.2 Net Profit Margins (%) 7.9 11.0 4.0 7.9 5.2 Balance Sheet (Rp bn)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 1,012 1,671 1,959 2,343 3,035 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 9 4 4 4 4 Cash & ST Invts 413 1,038 818 944 787 Inventory 846 458 940 1,345 1,906 Debtors 422 476 398 568 799 Other Current Assets 215 155 291 377 494 Total Assets 2,917 3,802 4,409 5,580 7,024 ST Debt 173 565 254 354 454 Creditor 325 420 338 483 684 Other Current Liab 1,297 524 1,401 2,049 2,817 LT Debt 369 1 1 1 1 Other LT Liabilities 24 89 89 89 89 Shareholder’s Equity 680 2,144 2,272 2,553 2,927 Minority Interests 50 59 55 52 52 Total Cap. & Liab. 2,917 3,802 4,409 5,580 7,024 Non-Cash Wkg. Capital (139) 144 (110) (241) (302) Net Cash/(Debt) (128) 472 562 588 331 Debtors Turn (avg days) 50.5 50.0 54.9 42.5 42.8 Creditors Turn (avg days) 62.0 50.3 56.4 42.7 42.9 Inventory Turn (avg days) 143.6 87.9 104.1 118.9 119.4 Asset Turnover (x) 1.0 1.0 0.7 0.8 0.9 Current Ratio (x) 1.1 1.4 1.2 1.1 1.0 Quick Ratio (x) 0.5 1.0 0.6 0.5 0.4 Net Debt/Equity (X) 0.2 CASH CASH CASH CASH Net Debt/Equity ex MI (X) 0.2 CASH CASH CASH CASH Capex to Debt (%) 84.0 139.6 141.1 132.3 175.8 Z-Score (X) 3.4 5.0 3.1 2.8 2.5


We expect WTON to maintain a net cash position.

2Q15 margin was exceptionally high as WTON received many small-sized, high-margin orders.


Company Guide

Wijaya Karya Beton

Cash Flow Statement (Rp bn)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 329 412 297 461 639 Dep. & Amort. 61 85 73 86 108 Tax Paid (125) (125) (74) (115) (160) Assoc. & JV Inc/(loss) 0 0 0 0 0 Chg in Wkg.Cap. (166) (283) 254 131 61 Other Operating CF 25 104 0 0 0 Net Operating CF 124 192 549 563 648 Capital Exp.(net) (454) (790) (360) (470) (800) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 0 0 0 0 0 Net Investing CF (454) (790) (360) (470) (800) Div Paid (63) (20) (99) (68) (105) Chg in Gross Debt 519 13 (311) 100 100 Capital Issues (53) 1,193 0 0 0 Other Financing CF 0 37 0 0 0 Net Financing CF 403 1,224 (410) 32 (5) Currency Adjustments 0 0 0 0 0 Chg in Cash 73 625 (221) 125 (157) Opg CFPS (Rp) 43 54 34 50 67 Free CFPS (Rp) (49) (69) 22 11 (17)




S.No. DateClosing

PriceTarget Price

Rat ing

1: 26 Jan 15 1330 1600 BUY

2: 10 Mar 15 1360 1600 BUY

3: 04 May 15 975 1200 BUY

4: 27 May 15 1170 1200 BUY

5: 10 Aug 15 1060 1200 BUY


1

2

3

4

5

741

841

941

1041

1141

1241

1341

1441

Nov-14 Mar-15 Jul-15 Nov-15

Rp

Industry Focus


AllianceDBS 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 GENERAL DISCLOSURE/DISCLAIMER This report is prepared by AllianceDBS Research Sdn Bhd (“ADBSR”). This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of AllianceDBS Research Sdn Bhd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved,

and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts,

ratings or risk assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 1 Feb 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates do not have a

proprietary position in the securities recommended in this report as of 31 Dec 2015.

Industry Focus


2.

Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

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located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

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Wong Ming Tek, Executive Director, ADBSR

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This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

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indonesia construction 1-feb-2016 id - dbs group pembangunan 3,900 1,382 4,650 2.4 2.6 buy wijaya...

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