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Friday, December 23, 2011

PT PP.Tbk - Size Does Matter

by Etrading Securities:

Size Does Matter

Construction industry growth remains high in the country. This development is supported by solid growth in economics condition, and Government commitment to improve infrastructure development in the country Land acquisition Bill helps to fastening the progress of building infrastructure. For solving the land clearance issue, government plans to pass the land acquisition bill in the end of this month.

Change on contract structure on PTPP.

PTPP plans to enter on multi years contract in the future, this development will help to secure its revenue in longer period. Diversifying its business. PTPP enter into investment in infrastructure project this year, and also plans to spin of its property unit to single entity. This will drive down overhead cost, and possibly diversify company risk.

PTPP is solid in its financial performance.

In Q3 Revenue Increase 30.07% from last period. Construction contribute for the biggest percentage in revenue, as much as 93.43%. Furthermore, EPC contributes for 4% of total revenue, and Realty and property contribute for 1.28% and 1.29% respectively. Cost of contract counts for 89.21% from revenue in Q3 2011, lower than Q3 2010 at 91.47%.

Our estimates and valuation. We get the DCF valuation of PTPP at 550/share based on WACC of 10.80%. Moreover, the WACC consists of Cost of Equity at 14.35% and Cost of Debt after Tax at 9.66%. We also assume the terminal growth rate at 2%. Furthermore, this price implies potential upside of 21% from current price. Therefore, based on this valuation we give a Buy recommendation on PTPP

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