Construction Sector Outlook

New contracts picking up strongly

The four SOE contractors under our coverage booked average increase of 46% YoY in new contracts in 8M15 to Rp 48.8 tn compared to Rp 34.8 tn in 8M14. ADHI took the lead and delivering the strongest new contract wins growth of 73% YoY to Rp 7.8 tn. This is followed by WIKA which booked new contract growth of 55% to Rp 13.4 Tn. In term of new contract value, PTPP fared better than peers with new contract booking of Rp 16.1 tn (+46% YoY). Project awards portion from the government budget have improved from 31% in beginning of 2015 to 41% in September 2015.

Capital injection to boost expansions

2016 state budget shows number of listed companies that will receive government capital injection namely WIKA (Rp 4 tn), KRAS (Rp 2.46 tn), PTPP (Rp 2 tn) and JSMR (Rp 1.25 tn). Investors will have to contend with issue next year but as with WSKT earlier this year, this may simply offer confidence to the view that they will be taking on more business on stronger balance sheets, enabling both WIKA and PTPP to leverage its higher equity next year. As budget allocation for PTPP of stands at Rp 2.0 tn (govt. owns 51% stake) its total rights issue proceeds might reach Rp 3.9 tn, or 1.5x of its current equity of Rp 2.7 tn. As for WIKA which will receive Rp 4.0 tn from the government (65% stake) and it could secure rights issue proceeds worth Rp 6.1 tn or 1.5x of its current equity of Rp 4.0 tn.

Valuation drops by 35% off the peak

Following the pull back in the share prices YTD, with the exception of WSKT and PTPP, the contractors’ forward  PER decreased by 35% to 20x, close to the historical average of 17x. We believe the correction should present a good entry opportunity in anticipation of acceleration in the execution of infrastructure projects in 2H15 and leading into 2016.