by JP Morgan
Even though we are excited about the growth prospects of Wijaya Karya as mega projects are taking shape, following the 123% YTD outperformance, we view that current valuations already reflect some of the positive news. There is a risk that execution upside is capped at 25-30% y/y growth in FY13E due to difficulties on finding skilled workers. With a potential revenue cap and premium valuations, we downgrade WIKA to Neutral
· Stock outperforms on positive newsflow. Indonesia is commencing multiple mega projects in 2H12-FY13, such as Jakarta MRT, Tanjung Priok Port, and 6 Jakarta Urban Toll Roads. These high-profile projects and the new land acquisition law have driven WIKA’s outperformance by 123% YTD. The final announcement of Jakarta MRT would likely happen in mid-November. As the largest player in construction and precast concrete (up to 50% of the Rp15tr construction cost), we think WIKA has strong prospects.
· Potential cap? There are emerging constraints on finding skilled labor, which could potentially cap its construction revenue growth at 25-30% in FY13E. Due to labor shortage, we estimate that WIKA’s earnings upside is capped at c. 10% from FY13E consensus/JPM forecast (assuming a best-case scenario of 30% growth on construction revenue and construction gross margin at 10%).
· Downgrade to Neutral. Even though we are excited on the positive newsflow, we downgrade WIKA to Neutral on valuation concerns and potential earnings cap. We tweak our FY13-14 forecast by 5-8% to account for higher construction margin and construction revenue. Our new June-13 PT is Rp1,290 (from Rp1,200 previously, based on 12x forward P/E). Key upside risk: Our concern could prove premature, if positive newsflow continues, driving momentum. Key downside risk: Slower-than-expected roll-out of mega projects.
3Q12 margin pressure likely; 9M12 to still be in line — CPIN and JPFA are scheduled to report their 3Q12/9M12 results towards the end of Oct. We expect both companies to potentially deliver weaker 3Q12 earnings. Key reasons: a) DOC prices were 6% YoY and 30% QoQ lower to Rp3,190/DOC (Fig 2), b) corn and soybean meal prices were 25% QoQ (13%YoY) and 24% QoQ (53% YoY) higher respectively (Fig 1); c) Rupiah had weakened by 10% YoY and 2% QoQ to Rp9,498 (Fig 3), which would translate to higher raw materials costs considering that 1/3 of raw mat’l costs comprises of soybean meal which is 100% imported. But given the strong 1H12 results the negative impact would be more muted on a 9M12 basis.