Tuesday, October 9, 2012

Positive newsflow but...

by JP Morgan

Wijaya Karya

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.

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