Adrianus Bias

WTON recorded strong 3Q18 results with earnings surging 42.8% yoy/16% qoq while revenue only grew by 5.6% yoy/7.7% qoq amid sustainable margin improvement. These resulted in 9M18 revenue growing by 20% yoy while earnings surged by 27% yoy, in line with our expectations. We believe consensus’ 2019 earnings forecasts are too conservative as they imply a new record-low burning rate and net margin that is lower than current running rate. Maintain BUY with lower target price of Rp580, pegged at 2019F PE of 8.8x (-1.5SD historical mean).

  • Strong 3Q18 results on margins improvement. WIKA Beton (WTON) booked revenue of Rp1.51t in 3Q18, up 5.6% yoy/7.7% qoq, while net income surged 42.8% yoy/15.9% qoq to Rp119b on the back of a strong improvement in margins with EBIT margins expanding by 230bp yoy/30bps qoq to 11.2% while net margins reached 7.9%, up by 210bps yoy/60bps qoq. WTON also recorded a significant increase in gains from JV to Rp14b (+92% qoq) mainly from the Jakarta LRT project that was completed in 3Q18 and largely offset the higher interest expense in 3Q18.
  • 9M18 results in line, with promising margins recovery. The strong set of 3Q18 results has resulted in 9M18 revenue growing 19.9% yoy to Rp4.1t and net profit reaching Rp280b (+26.9% yoy), largely in line with our expectation at 62% of our fullyear estimates. It is also interesting to note that WTON’s strong margins recovery in the past two quarters has brought its 9M18 gross and net margins to 13.3% and 6.8%, respectively, which is already above our and consensus’ 2018 expectations.
  • Improved leverage profile with strong operating cashflow in 3Q18. WTON’s total net debt in Sep 18 reached Rp1.28t (+26.7% yoy/-8.5% qoq), translating into net gearing of only 0.4x, while interest coverage ratio still hovered above 5.5x. The lower net-debt position in Sep 18 was helped by the strong operating cash flow (OCF) in 3Q18 which reached Rp439b, more than five times that of 2Q18, and resulted in 9M18 OCF turning positive at Rp154b.

9M18 new contract realisation in line with our expectation. As of end-Sep 18, WTON had obtained Rp5.04t of new contracts, meeting 67% of its internal target of Rp7.6t and coming in around 64% of our full-year assumption. This brought its total orderbook to Rp10.5t as at end-Sep 18, or more than 2x of its revenue in 9M18.

STOCK IMPACT

2019 new contract target of Rp9t, up 20% from 2018’s target. Despite not having revealed its full financial guidance for 2019, management has declared its 2019 new contract target of Rp9t, which is a 20% yoy growth from its 2018 target of Rp2.5t. We believe the 2019 new contract target is achievable considering several big projects will be started or/and accelerated next year, such as Jakarta-Bandung HSR, Jakarta MRT phase 2, Patimban seaport and Bandung urban toll road. The company’s 2019 new contract target is actually 5% above our assumption of Rp8.6t.

EARNINGS REVISION/RISK

We maintain our 2018-19 earnings and new contract assumptions. As 9M18 results and new contract achievement in Sep 18 were relatively in line with our expectation, we leave our 2018-19 forecasts unchanged.

Consensus’ 2019 revenue and earnings estimates are too conservative. Given the recent downgrade on consensus’ estimate, our 2019 revenue and earnings are now 10% and 20% above the consensus’ number. However, assuming WTON will achieve its 2018-19 new contract targets, consensus’ 2019 revenue target only reflects a 46% burning rate on WTON’s 2019 orderbook of Rp16t, which is even lower than the record low burning rate in 2016. In addition, consensus’ 2019 earnings estimate only reflects net margin of 6.7%, way lower than the current run-rate of 7.9% in 3Q18 and seems to have neglected the potential payment from Balikpapan-Samarinda toll road project in 2019 that will significantly reduce WTON’s leverage profile.

VALUATION/RECOMMENDATION

Maintain BUY with a lower target price of Rp580, as we lowered our target multiple to -1.5SD of the historical average PE of 8.8x on 2019F EPS, which is in line with our target multiple for construction sector. WTON is currently trading at 5.3x forward PE, which translates into a rather undemanding -1.8SD of its historical mean, as we expect the company to book 26.2% earnings CAGR in 2018-20. We maintain WTON as one of our top picks in the construction sector on the back of its strong earnings growth, healthy balance sheet, robust operating cashflow, and scope of works advantage over its peers.

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