Danareksa Equity Snapshot – Construction Sector (OVERWEIGHT) Deconstructing the sector November 30, 2018
By Maria Renata |
We have employed a scoring methodology to assess the health of the construction sector and to rank the companies. We use 6 parameters, namely: 1) new contracts achievement, 2) 9M earnings performance, 3) the burn rate, 4) financing of the order book, 5) leverage, and 6) earnings growth. Based on these parameters, WIKA (BUY, TP: ID2,200) has the highest score of 3.0 (out of 4.0), followed by PTPP (BUY, TP: IDR2,700), ADHI (BUY, TP: 2,150), and WSKT (BUY, TP: IDR2,400).
We undertook this exercise to address some of the main concerns on the sector. For parameter 1, we try to address investor concerns on the realization of the new contracts (NC) target. We use the NC booked as of Oct 18 compared to the management’s target set at the beginning of the year. We use the initial target to capture the management’s optimism at the start of 2018 and to establish how well the company delivered on its promises to investors. We find that PTPP has the highest realization rate at 71.9%. Some of the companies have cut their targets during the year, while some of the others are expected to do so in the near future.
Seasonality in the interim results. There is strong seasonality in the sector’s interim performance. Hence, for parameter 2, we use the realization of the 9M18 performance to the company’s target compared to the historical average in the past two years. We find that WSKT has the highest score on the back of 84.8% 9M18 earnings realization (before minorities). However, WSKT’s strong 9M result was supported by IDR1.8tn of other income. We believe that the one-time gain owed to the issuance of RDPT in Apr 18. However, we believe that even by excluding this one-time gain, WSKT’s score would not see a significant change.
Are there any obsolete contracts in their order books (OB)? With the massive OB in the pipeline, the question arises as to whether all the contracts are viable and will generate revenues in the future. In our burn rate calculation, we use carry over (CO) contracts instead of OB by assuming that all NC obtained this year are still in the preparation stage and no work has been done yet. For the burn rate parameter (number 3), WSKT has the highest score of 40.1% due to the government’s target for the operation or connectivity of the Trans Java toll road by the end of 2018 or early 2019.
High OB = high debts: true or false? The concern that an increase in jobs booked by a contractor will automatically lead to higher debt is unfounded based on our findings. For parameter 4, we compare the OB to total debts. PTPP’s ratio of 7.2x (the highest in the sector) implies that for every additional IDR1.0tn of debts taken on by the company, IDR7.2tn of OB or works are generated. This is also reflected in PTPP’s low leverage – parameter 5. As of Sep 18, PTPP’s DER stood at 0.8x, the lowest among the 4 SOE contractors.
WIKA is our new top pick. As earnings growth remains a concern, we find that WIKA’s 2019 earnings growth of 33.5%yoy is the highest among the contractors. In our exercise, WIKA obtained a score of 3 in 4 other parameters, making WIKA our main stock pick replacing ADHI. In addition, we update our forecasts on PTPP, WSBP, and WSKT.
WIA scores highest. Based on our 6 parameters, WIKA ranked 1st with the highest score (3.0 out of 4.0) followed by PTPP, ADHI, and WSKT. Our parameters were chosen to reflect the main concerns of investors.
PTPP: Maintain BUY with a new TP of IDR2,700. Our new TP of IDR2,700 (old: IDR2,800) implies an unchanged 2019 PE of 9.0x, based on -1SD historical PE. The change in our TP is due to our -6% lower 2019 earnings target. We cut our 2018 revenues and earnings targets by 12%-13% given the soft 9M results.
WSBP: Maintain BUY with a new TP of IDR480 (old: IDR500). We cut our 2018 NC target by 17.5% to IDR6.6tn, based on the management’s new target. During the year, the management has cut the NC target twice. The NC target set at the beginning of the year was IDR11.5tn (+4.4%yoy), and it was lowered to IDR8.3tn (-24.8%yoy). The NC target of IDR6.6tn is 40.2%yoy lower than the achieved NC in 2017 of IDR11.0tn. As such, our 2019 revenues and earnings targets are reduced by 13% and 8%, respectively. We arrive at a new TP of IDR480 based on -1SD historical 2019 PE of 11.0x – unchanged.
WSKT: Maintain BUY with a new TP of IDR2,400 (old: IDR2,300). We revise up our 2018 earnings target by 14.6% by including IDR1.8tn of other income and IDR1.0tn of interest income booked by WSKT in 9M18. As such, we expect the 2018 earnings to reach IDR4.9tn (+26.7%yoy). For 2019, we forecast earnings of IDR3.8tn (-22.1%yoy). However, we expect +1.8%yoy and +2.3%yoy growth in core net income in 2018 and 2019. Our new TP implies 8.5x 2019 PE (old: 10.0x), based on the average historical PE – 1SD; unchanged.