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