Friday, September 28, 2012

Sector’s star

Wijaya Karya (WIKA-BUY-IDR1,210-TP:IDR1,400)

Integration and operating margin expansion through diversification
Wijaya Karya (WIKA) is the most diversified and largest listed state owned construction companies.  In construction services, WIKA has been expanding into EPC which continues to drive up its operating margins to 8.4% in 1H12 (Bahana’s FY12: 8.5%).  Additionally, future margin expansion will be achieved through WIKA’s focus on recurring incomes from power plants and property.  Going forward, we expect growth from concrete products and property to outstrip the lower-margin busineess of construction services (exhibit 18), further supporting the company’s strong operating margin outlook.  Separately, with its high market share of 60% in concrete products, WIKA Beton will contribute a larger revenue of IDR2t (25% of 2012 total), up 42% y-y. In mid-2013, Beton will finish its ninth plant in Balikpapan, East Kalimantan, raising its total concrete production capacity by 11% to 2.05m tpa, raising 2013 contribution to 26% of total revenues.  Further production capacity could occur on the back of WIKA Beton’s plan for an IPO next year. That said, Beton’s increased volumes ahead will also mean enhanced integration as concrete is 20% internally consumed by WIKA.

Net cash position ensures greater future projects and profit growth
In 2H12 and beyond, we expect earnings to be supported by 8M12 new contracts which reached IDR10t, representing 61% of expected 2012 full-year target of IDR16.3t (exhibit 17).  Going forward, we believe WIKA, which has the best balance sheet amongst the listed state-owned construction companies, is poised to benefit from the government’s plan to intensify completion of various infrastructure-related projects including ports, airports, power plants and toll roads, which amount to IDR888t from 2011-25 (exhibit 21). Future projects include a power plant in Rawa Minyak and LPG terminal Makassar (exhibit 20).  Therefore, these aggregate new contracts amounting to IDR16.3t (+22.4% y-y) coupled with WIKA’s carried-over order book of IDR13.4t this year will result in 18% y-y revenue growth to IDR9.1t,  the largest amongst Indonesia’s listed construction firm.  On the bottom line, we estimate WIKA to grow 2012 earnings by 20% y-y to IDR426b, before further growth acceleration of 24% y-y in 2013 to IDR527b.

Solid management & track record = Warranted premium; BUY
WIKA is arguably the best managed listed state-owned construction company in our coverage.  Testimony to this is the company’s 28.7% CAGR in 2007-11 net profit, which has been accompanied by 190% increase in share price to date since its listing in 3Q07.  In 2012, WIKA’s share price has continued to do well, outperforming the market by 96% ytd.  That said, quality does come at a price.  We note that WIKA’s 2013 PE of 13.9x is at 10% higher than its Indonesian peers.  Our target price of IDR1,400 is based on further PE re-rating to 15.5x in 2013, justified its excellent historical track record and continued bright operating outlook, marked by expanding margins and strong growth.  On 16% upside potential, we re-initiate WIKA with a BUY.

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