Thursday, 20 August 2015

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CONSTRUCTION SECTOR/COMPANY UPDATE

Last Price, IDR 2,715No. of shares (mn) 6,107

Market Cap, IDR bn 16,695

(US$ mn) 1,2063M T/O, US$mn 2.9

WIKA IJ/WIKA.JK

Joko Sogie(62-21) 2955 5827jokos@danareksa.com

HOLDTarget Price, IDR 2,500Upside (Downside) (7.9%)

Wijaya KaryaFacing headwinds

WIKA has just held its semi-annual analyst meeting at which the company providedmore clarity on its future prospects. The main takeaways from the meeting touchedon its difficult-to-achieve targets for this year and its future investment pipeline.This year’s targets will be very challenging stated the management, citing delays insome major infrastructure projects that had initially been expected to begin in 1H15.Furthermore, targeted investments are still focused on the upcoming power plantprojects and the exciting high-speed railway project. To price in the lacklusterperformance of both WTON and WIKA’s property arm this year, we cut our earningsestimates by 32%/36% in FY15F/16F with net profits expected to reach Rp573bn/638bn. Consequently, our TP is lowered to Rp2,500.

Targets not yet revisedIn 1H15, WIKA signed a total of Rp10.4tn new contracts in addition to Rp4.2tn of lowest-bid projects.Even though this figure is up 46%y-y, it is still way behind the company’s target of Rp31.6tn.Adversely impacting the company’s performance this year have been the underachieving WTONand WIKA’s property arm. In WTON’s case, the company has faced a more competitive landscapesince the other state-contractors establishing precast facilities have preferred to use their internalcapacity in their own projects, eroding WTON’s market by nearly 10% this year. Property sales,meanwhile, have been disappointing, largely due to the lack of new projects, land bank constraints,and challenging conditions affecting the high-end segment. For now, the management is stillreviewing its targets with the possibility of downgrading guidance in the coming weeks.

Further investments in the pipelineWith potential Rp4.6tn rights issue plan in 2016, WIKA plans to use the proceeds in severalinvestments including power plant projects and to initiate Indonesia’s first high-speed railway.For its power plant projects, WIKA will only act as the minority investor in the Java-3, Java-5, andJava-7 power plants. For its HSR projects, meanwhile, WIKA may possibly emerge as the majoritystakeholder in view of the latest scheme proposed by the consortium. In our view, the power plantprojects will provide a greater benefit to the company’s business since WIKA’s goal is to achieveexpertise in the EPC business as well as gain recurring incomes. We still have lingering concernson the company’s move into HSR, however, as the move would significantly constrain thecompany’s balance sheet going forward due to business consolidation post-operation.

Lowering our TP to Rp2,500; Downgrade to HOLDIn the past, WIKA has been the darling in the Indonesian construction sector thanks to its excitingdiversification story, its large order book size, in addition to having the largest market cap amongits peers. Now, however, the company is facing stronger headwinds, as reflected in the fact thatits order book has been surpassed by other state-contractors. A lack of earnings visibility andWTON’s sluggish performance prompt us to downgrade our recommendation to HOLD.

2013 2014 2015F 2016F 2017F

Revenues, Rp bn 11,885 12,463 12,813 15,589 18,782EBITDA, Rp bn 1,356 1,592 1,534 1,896 2,339EBITDA Growth, % 40.8 17.4 (3.6) 23.6 23.3Net Profit, Rp bn 570 615 573 638 723Core Profit, Rp bn 668 701 604 668 752Core EPS, Rp 109 114 98 109 122Core EPS Growth, % 33.0 4.7 (13.8) 10.5 12.6Net Gearing, % 8.9 14.7 29.0 37.4 42.3PER, x 29.2 27.1 29.1 26.2 23.1Core PER, x 24.9 23.8 27.6 25.0 22.2PBV, x 5.2 3.4 3.0 2.7 2.4EV/EBITDA, x 12.5 10.9 11.9 10.0 8.4Yield, % 0.7 0.7 0.8 0.8 0.9

WIKA relative to JCI Index

Our Cons % DiffTarget Price, IDR 2,500 3,236 -22.7EPS 2015F, IDR 93 110 -15.5PE 2015F, x 29.1 24.7 17.8

Market Recommendation

Danareksa vs Consensus

31-Jul-2015 BUY IDR 4,00004-May 2015 BUY IDR 4,00017-Mar-2015 BUY IDR 4,000

Last Recommendation

2,000

2,500

3,000

3,500

4,000

8/20

/14

9/17

/14

10/1

5/14

11/1

2/14

12/1

0/14

1/7/

15

2/4/

15

3/4/

15

4/1/

15

4/29

/15

5/27

/15

6/24

/15

7/22

/15

8/19

/15

-20

-10

0

10

20

30

WIKA (LHS) Relative to JCI Index (RHS) %IDR

3

9

12

SELL

HOLD

BUY

2

20 August 2015 Wijaya Karya

What is the best possible outcome this year?Even with hopes of brisker infrastructure project flows in 2H15F, we still only expect WTON’srevenues to reach nearly Rp3.0tn (vs. Rp4tn initially) with net profits of Rp200bn (vs. Rp365bninitially). As such, the industrial segment earnings contribution will fall short, reaching onlyRp136bn in FY15F compared to an initially expected Rp216bn by the management. On topof that, WIKA’s lackluster property business will not make much of a contribution to thecompany’s earnings this year. For the full year, the company had initially expected thecontribution from property earnings to reach Rp126bn, although the figure stood at adismal Rp3.5bn in 1H15. Against this backdrop, we expect earnings contribution from bothindustrial and property segment to be reduced to nearly Rp177bn in FY15F, down 45%y-y, or Rp165bn short from the management’s initial target.

However, better expected performance of its main business infrastructure and industrialplants should provide some relief since this segment may be the only one to post growththis year, as seen in 1H15 figures. In 2015, we estimate earnings from this segment to grow35%y-y, generating Rp100bn of additional earnings.

Hence, overall, WIKA will still deliver negative earnings growth for this year. For 2016F, thelower 2015 base plus the expectation of higher new contracts fueled by better governmentexecution should be able to bolster the earnings growth. All in all, we cut our earningsforecasts by 32%/36% in FY15F/16F to only Rp573bn/638bn – a 25% discount to thecompany’s target.

Exhibit 1. Segmental revenues and net profit (IDR bn)

FY13 FY14 FY15F Chg y-y, %

Revenues 11,885 12,463 12,813 2.8Infrastructure and EPC 8,025 7,909 9,573 21.0Industrial 2,728 3,271 2,626 (19.7)Property realty 1,132 1,283 614 (52.2)

Net profit 571 615 573 (6.8)Infrastructure and EPC 288 294 396 34.8Industrial 219 218 136 (37.9)Property realty 77 103 42 (59.6)

Source: Company, Danareksa Sekuritas

Exhibit 2. Changes in our forecast (IDR bn)

Current Previous Changes, %2014 2015F 2016F 2015F 2016F 2015F 2016F

New contracts 17,632 22,722 26,935 22,853 26,216 (0.6) 2.7Order book 41,416 43,420 51,183 53,909 63,142 (19.5) (18.9)

Revenues 12,463 12,813 15,589 16,504 19,486 (22.4) (20.0)Gross profit - ex. JO 1,425 1,310 1,620 1,944 2,292 (32.6) (29.3)Operating profit 1,401 1,268 1,515 1,816 2,154 (30.2) (29.7)Net profit 615 573 638 843 1,004 (32.0) (36.4)

Source: Company, Danareksa Sekuritas

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Wijaya Karya20 August 2015

Exhibit 3. Profit and loss (IDR bn)

2013 2014 2015F 2016F 2017F

Revenues 11,885 12,463 12,813 15,589 18,782COGS 10,562 11,039 11,503 13,970 16,773Gross profit 1,322 1,425 1,310 1,620 2,008Income from JO 261 370 358 380 419Gross profit incl. JO 1,583 1,794 1,668 2,000 2,428Operating expenses (367) (393) (400) (485) (579)Operating profit 1,216 1,401 1,268 1,515 1,848Net interest expenses (40) (124) (161) (235) (349)Other income (expenses) (159) (131) (50) (50) (50)Pre-tax income 1,017 1,146 1,057 1,230 1,450Income tax (392) (395) (402) (491) (598)Minority interest (54) (136) (82) (101) (129)Net profit 570 615 573 638 723Core profit 668 701 604 668 752

Source: Company

Exhibit 4. Balance sheet (IDR bn)

2013 2014 2015F 2016F 2017F

Cash & equivalent 1,387 2,301 1,482 1,588 1,485Trade receivables 1,479 1,963 2,135 2,598 3,130Project receivables 2,564 2,938 2,776 3,378 4,069Inventories 1,118 817 959 1,164 1,398Other current assets 1,446 1,496 1,561 1,864 2,201Total Current Assets 7,994 9,514 8,913 10,592 12,283

LT investments 2,236 3,176 3,560 4,142 4,792Fixed assets 1,640 2,676 3,711 4,695 5,639Other assets 724 548 438 328 218Total Non-current Assets 4,601 6,401 7,709 9,166 10,649TOTAL ASSETS 12,595 15,915 16,622 19,758 22,933

ST loans 278 929 1,750 2,750 4,250Trade payables 3,089 3,903 3,834 4,657 5,591Current portion of LT loans 124 780 196 994 88Other current liabilities 3,808 2,865 3,008 3,653 4,386Total Current Liabilities 7,298 8,476 8,788 12,053 14,315

LT loans 1,271 1,324 1,133 136 47Other liabilities 799 1,137 1,190 1,434 1,711Total Non-current Liabilities 2,070 2,460 2,322 1,570 1,758Minority interest 278 989 1,071 1,172 1,301Capital stock 1,317 1,321 1,321 1,321 1,321Retained earnings 1,202 1,518 1,969 2,492 3,087Other equity 429 1,151 1,151 1,151 1,151

Total Equity 3,227 4,979 5,511 6,135 6,860TOTAL LIABILITIES AND EQUITY 12,595 15,915 16,622 19,758 22,933

Source: Company

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20 August 2015 Wijaya Karya

Exhibit 5. Cash flow (IDR bn)

2013 2014 2015F 2016F 2017F

Pretax profit 1,017 1,146 1,057 1,230 1,450Minority interest (54) (136) (82) (101) (129)Tax (630) (370) (407) (548) (664)Depreciation 140 191 266 381 490Changes in W/C 33 (718) (108) (23) (42)Others 127 338 53 244 277Cash Flow from Operation 632 451 780 1,184 1,382

Capex (597) (1,226) (1,301) (1,366) (1,434)Investments (420) (806) (304) (499) (557)Cash Flow from Investing (1,017) (2,032) (1,605) (1,865) (1,992)

ST loans 44 650 821 1,000 1,500Current portion of LT loans 37 656 (584) 798 (906)LT loans 337 53 (191) (997) (89)Equity (40) 1,308 82 101 129Dividend & CSR (137) (171) (123) (115) (128)Cash Flow from Financing 240 2,496 6 787 507

Change in Cash (145) 914 (819) 106 (103)

Source: Company

Exhibit 6. Key ratios

2013 2014 2015F 2016F 2017FProfitability, %Gross margin - excl. JO 11.1 11.4 10.2 10.4 10.7Gross margin - incl. JO 13.3 14.4 13.0 12.8 12.9Operating margin 10.2 11.2 9.9 9.7 9.8EBITDA margin 11.4 12.8 12.0 12.2 12.5Net margin 4.8 4.9 4.5 4.1 3.8Core margin 5.6 5.6 4.7 4.3 4.0ROAE 18.8 15.0 10.9 11.0 11.1ROAA 4.8 4.3 3.5 3.5 3.4

LeverageDebt to equity, % 51.8 60.9 55.9 63.2 63.9Net debt to equity, % 8.9 14.7 29.0 37.4 42.3Interest coverage, x 19.0 7.1 4.8 4.8 4.4

Turnover, daysTrade receivables 45 57 60 60 60Inventories 38 27 30 30 30Trade payables 105 127 120 120 120

Growth, %Revenue 20.0 4.9 2.8 21.7 20.5Operating profit 39.8 15.2 (9.5) 19.5 22.0EBITDA 40.8 17.4 (3.6) 23.6 23.3Net profit 19.7 7.9 (6.8) 11.3 13.3Core profit 33.7 5.0 (13.8) 10.5 12.6

Source: Company

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Wijaya Karya20 August 2015

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