Monday, December 15, 2014

CONSTRUCTION SECTOR/COMPANY UPDATE

Adhi Karya
BUY
Target Price, Rp 3,850
Upside 26.8%

Starting over

ADHI’s share price underperformed its state-owned peers in 2014. Low order books
– which led to weaker earnings visibility – were the main reason behind the poor
share price performance. However, 2015 should be a better year for ADHI since the
government plans to increase the Public Works Ministry budget from Rp81tn to
Rp123tn. This should bode well for ADHI’s new contracts achievement. Also supported
by its growing property business and undemanding valuation, we believe that ADHI
represents a good opportunity for bottom-fishing in our construction stock universe.
All in all, we reiterate our BUY call on the company with a revised TP of Rp3,850,
derived from target FY15F P/E of 16.6x – at par with the sector mean during the upcycle
period. Currently, the stock trades at a 35% discount its peers’ average.

Bottoming out in 2014
Since early in the year, we had cautioned investors that ADHI’s growth would decline considerably
in 2014 due to several factors, namely: 1) the shortfall in carry-over projects from 2013, 2) the impact
of the political transition, marked by the government’s budget cuts which culminated in weaker
new contracts progress and 3) the losses booked by the company’s EPC business. Given these
developments, ADHI’s FY14F result will not be exciting and the company will record declining
growth from the top-line down to the bottom-line. Thus, given the current pace of new contracts
awarded and taking into account the company’s seasonality, we foresee that in FY14F ADHI will
only book Rp8.3tn of new contracts (-24%), with Rp9.6tn of revenues (-2%) and Rp268bn of net
profits (-34%).

2015: Set to enjoy a windfall given its state-owned contractor status
We believe the worst is now over for ADHI and that a reversal story may emerge in 2015. Learning
from the past, ADHI has a high dependency on government projects, as the biggest portion of
its construction revenues were derived from the Public Works Ministry. With President Jokowi keen
to accelerate infrastructure development, the Public Works Ministry budget is expected to be
increased from Rp81tn in the 2015 state budget to Rp123tn in the revised 2015 state budget (+65%yy)
– which will be the main catalyst to fuel ADHI’s order book in FY15F. Hence, we are projecting
new contracts to reach Rp14.4tn in FY15F with earnings to grow 56% to Rp419bn. Also worth noting
is that ADHI’s growing property business will help support the bottom line given its high profit
margins.

Valuation: BUY – steep discount to its peers
ADHI’s share price has underperformed since its all-time high in May 2013. In our view, the bleak
outlook for 2014 was the main cause and the company has been well-punished by the market.
However, we now feel that the worst is over for ADHI given that the company will likely benefit
from higher infrastructure spending. As such, we reiterate our BUY call on ADHI. Utilizing the target
FY15F P/E of 16.6x – at par with the sector mean during the up-cycle period – we arrive at our revised
TP of Rp3,850.

source: Danareksa  dated 8 December 2014