BUY Target Price, IDR 2,100 Upside (downside) 17%

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1 Friday, 5 March 2015 BUY Target Price, IDR 2,100 Upside (downside) 17% WSKT IJ/WSKT.JK Last Price, IDR 1,795 No. of shares (mn) 9,632 Market Cap, IDR bn 17,289 (US$ mn) 1,331 3M T/O, US$mn 4.3 Last Recommendation 25-Feb-15 BUY Rp 1, Jan-15 BUY Rp 1, Oct-14 BUY Rp 1,150 WSKT relative to JCI Index IDR 2,000 1,800 1,600 1,400 1,200 1, /6/14 4/3/14 5/1/14 5/29/14 6/26/14 7/24/14 8/21/14 9/18/14 10/16/14 11/13/14 12/11/14 1/8/15 2/5/15 3/5/15 Market Recommendation BUY HOLD SELL WSKT (LHS) 3 3 Relative to JCI Index (RHS) Consensus Our Cons % Diff Target price, IDR 2,100 1, EPS 2015F, IDR PE 2015F, x % CONSTRUCTION SECTOR/COMPANY UPDATE Entering a new era 2014 turned out to be a remarkable year for WSKT, recording not only unsurpassed new contracts but also higher margins owed largely to the company s strategic move into toll road projects. Nonetheless, WSKT started 2015 with carry-over projects of Rp17.8tn, 27% of them toll road projects. With the government s plan to undertake capital injections in 3Q15F, we believe that WSKT s standing as a major toll contractor specialist will be sustained going forward. All in all, besides incorporating the 2014 figures, we also roll over our valuation to 2016F to capture the company s earnings growth potential. We estimate WSKT s earnings to grow by 26% CAGR in FY14-16F on the back of larger order book size (20% CAGR) as well as margins improvement from the higher margin toll road projects. We reiterate WSKT as one of our Top Picks in our construction universe with a revised Target Price of Rp2,100. BUY. Delivering on its promises WSKT s FY14 result came out better-than-expected. While revenues only grew 6% to Rp10.3tn, net profits surged 36% to Rp502bn. The robust bottom line growth mainly stemmed from a better gross margin to 10.8% as well as the almost twofold increase in JO profits to Rp197bn in FY14. This improvement mainly supported from company s toll projects that initiated in 4Q14. In 2014, WSKT also was the best new contracts achiever among the state-contractors, with total new contracts of Rp22.4tn (+68%y-y). Nonetheless, total carry-over projects to 2015 are at Rp17.8tn, or 1.4x its FY14 total revenues. Future growth is secured WSKT s strategy to venture into the toll roads business has not only increased the company s order book size, but profitability as well. In 2014, WSKT bagged Rp5.9tn projects from two companyowned toll projects: Rp1.7tn from Pejagan-Pemalang section and Rp4.2tn from Becakayu section. Encouragingly, the gross margin offered by these project ranges from 13-15% for the civil works and from 20-25% for the precast products as seen in 4Q14 result. Aside from these two sections, WSKT also has some minority shares in another three sections. Thus, WSKT will have a total of at least Rp9tn of high margin toll road projects to be delivered in the next three years. The balance sheet is not a problem, especially with the capital injection in 3Q14F The management hinted that for every Rp1tn of equity, WSKT balance sheet could take up to Rp20tn of additional new projects in its order book. As the government has set aside Rp3.5tn for WSKT s capital injection to maintain its ownership, we can conclude that WSKT s rights issue will result in Rp5.2tn. With the proceeds, WSKT is targeting to acquire majority ownership in some financially-halted toll road projects as well as participate as minorities in new toll road tenders. In our view, the company might possible take up to Rp46tn new contracts of toll projects. Currently, we still set our new contracts target in line with the management s guidance at Rp22.4tn in FY15F. Nevertheless, we believe potential earnings upside still exists from larger order book that will drive earnings higher in FY16F, even though potential earnings dilution might still occur in FY15F F 2016F 2017F Joko Sogie (62-21) jokos@danareksa.com Danareksa research reports are also available at Reuters Multex and First Call Direct and Bloomberg. Revenues, IDR bn 9,687 10,287 13,209 16,944 20,328 EBITDA, IDR bn ,367 1,723 1,996 EBITDA Growth, % Net Profit, IDR bn Core Profit, IDR bn Core EPS, IDR Core EPS Growth, % Net Gearing, % PER, x Core PER, x PBV, x EV/EBITDA, x Yield, % See important disclosure on the back of this report

2 5 March 2015 Delivering on its promises WSKT s FY14 result came out better-than-expected. While revenues only grew 6% to Rp10.3tn, net profits surged 36% to Rp502bn. The robust bottom line growth mainly stemmed from a better gross margin (ex. JO), which expanded by 1.4pps to 10.8% as well as the almost twofold increase in JO profits to Rp197bn in FY14. The improvement in the gross margin came from the substantial contribution of precast sales to KKDM (Becakayu toll road), which had a 22.4% gross margin in 4Q14, as well as a stable core business construction service s gross margin of 10.1% during the year. Meanwhile, higher operating expenses were due to higher receivable allowances from a single project in BPD Riau worth Rp53bn. As a result, WSKT could significantly improve its net margin from 3.8% in FY13 to 4.9% in FY14 above the company s guidance as well as the street s expectations. Worth noting is that seasonality still persists with WSKT booking most of its revenues and earnings toward the year-end. Exhibit 1. WSKT s FY14 Results (IDR bn) FY13 FY14 y-y, % 4Q13 3Q14 4Q14 q-q, % y-y, % New contracts 13,319 22, ,312 6,394 8, Revenues 9,687 10, ,538 2,099 5, Gross profit - ex JO 911 1, Gross profit - in JO 1,012 1, Operating profit EBITDA Net interest (70) (140) (17) (31) (55) Pre-tax income Net profit Gross Margin - ex JO, % Opex to sales, % Operating Margin, % EBITDA Margin, % Net Margin, % Exhibit 2. Seasonality toward year-end still persisted 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 100% 100% Revenues seasonality 75% 50% 25% 47% 47% 49% 47% 22% 22% 20% 22% 22% 21% 21% 21% Net profit seasonality 75% 50% 25% 60% 68% 29% 17% 74% 14% 67% 20% 0% 9% 10% 10% 10% Y-Avg 0% 12% 14% 11% 12% 0% 1% 1% 1% Y-Avg In 2014, WSKT was the best new contracts achiever among the state-contractors. From Rp69tn of new contracts awarded to the four listed state-contractors in FY14, WSKT s share was 32%. The company won a total of Rp22.4tn of new contracts in FY14, up 68% from FY13 s achievement. In 4Q14, WSKT bagged Rp8.9tn of new contracts, of which Rp4.2tn came from the acquisition of the Bekasi-Cawang-Kp. Melayu toll road. Nonetheless, total carry-over projects to 2015 are Rp17.8tn, or 1.4x its FY14 total revenues (Non-JO and JO) meaning that its projects are sufficient to fuel growth going forward. 2

3 5 March 2015 Exhibit 3. Waskita S notable new projects in 2014 Project name Segment Type Value, IDR bn Bekasi-Cawang-Kp. Melayu Toll road Precast Toll road 3,046 Frontage Surabaya Civil Building 1,441 Bekasi-Cawang-Kp. Melayu Toll road Civil Toll road 1,168 Pejagan-Pemalang Section 1 Toll road Civil Toll road 1,123 Raknamo Dam Civil Dam 646 Suai Airport Expansion Civil Airport 643 Darmo Surabaya Apartment Civil Building 629 Gondang Dam Civil Dam 561 Pejagan-Pemalang Section 2 Toll road Civil Toll road 556 Balikpapan Stadium Civil Building 545 Oecusse Road Improvement Civil Road 532 Sopo Del Office Tower Civil Building 477 Depok-Antasari Package 1 Toll Road (JO) Civil Toll road 416 Konawe Sugar Factory (JO) Civil Building 311 Future growth is secured Since its IPO back in late-2012, WSKT s net profits have grown a remarkable 41% CAGR in FY12-14 despite revenues CAGR of only 8% in the same period. The improvement in gross margins from a better projects profile which the company promised during its IPO has been delivered so far, coupled with high profitability in its JO projects. Going forward, we believe the growth story is not over yet, given: 1) WSKT s solid ventures into toll road projects and 2) WSKT s ample order books at the current time. All in all, we expect another round of high growth with 26% earnings CAGR on the back of 28% CAGR in revenues from FY14-FY16F. Toll road ventures are a profitable business WSKT s strategy to venture into the toll roads business has not only increased the company s order book size, but profitability as well. With the release of WSKT s latest financial statements, we now have a better picture of WSKT s toll road projects. As mentioned in the statements, WSKT through its subsidiary, PT Waskita Toll Road (WTR), holds majority ownership in two toll road concessions, namely PPTR and KKDM. However, WSKT is not the controlling shareholder given the call option from its previous owner. Nonetheless, during the construction period, WSKT as the direct contractor is able to book the toll road project both the civil works and precast sales as earnings. In 2014, WSKT invested Rp300bn to acquire 99.9% ownership in PPTR to continue the Pejagan- Pemalang toll section and Rp240bn to attain 60.0% ownership in KKDM to begin the Bekasi- Cawang-Kp. Melayu toll section. The existing owner of PPTR has a call option at Rp458bn while the existing owner of KKDM has a call option at Rp449bn, both of which will mature in 2017F. Accordingly, WSKT bagged Rp5.9tn or 26% of its new contracts in 2014 from these two company-owned toll projects, i.e. Rp1.7tn from the PPTR section and Rp4.2tn from the KKDM section. From that amount, WSKT recognized Rp1.0tn of revenues in FY14 consisting of Rp600bn from PPTR and Rp400bn from KKDM. Encouragingly, the gross margin offered by this toll road project ranges from 13-15% for the civil works and from 20-25% for the precast products. As noted in the FY14 result, WSKT managed to book a solid 22.4% gross margin in precast sales to KKDM in 4Q14. 3

4 5 March 2015 Exhibit 4. WSKT s toll road scheme in PPTR and KKDM Toll section Pejagan-Pemalang Bekasi-Cawang-Kp. Melayu Owner Pejagan Pemalang Toll Road (PPTR) Kresna Kusuma Dyandra Marga (KKDM) WTR ownership, % Investment, Rp bn Start date 27-Jun Oct-14 Buyback date 27-Jun Oct-17 Buyback period 36 months 36 months Buyback, Rp bn Contract value, Rp bn 1,679 4,214 Aside from these two sections, WSKT also has some minority shares in another three sections: 1) Depok-Antasari (12.5% owned), 2) Medan-Kualanamu-Tebing Tinggi (15.0% owned), and 3) Legundi-Bunder (48.0% owned). The Depok-Antasari construction works were awarded in 2014 s JO project worth Rp634bn, while the Medan-Kualanamu-Tebing Tinggi and Legundi-Bunder construction works will be awarded in 2015F amounting to Rp1.0tn and Rp2.6tn, respectively. Exhibit 5. WSKT s participation in toll road projects Exhibit 6. Margins improvement is on the cards Section Length WSKT WSKT Investment Construction Target km own % Investment IDR bn IDR bn IRR,% IDR bn Pejagan-Pemalang ,340 1, Bekasi-Cawang-Kp. Melayu ,623 4, Depok-Antasari ,085 3, Medan-Kualanamu-Tb. Tinggi ,072 3, Legundi-Bunder ,292 2, As a result, WSKT will have a total of at least Rp9tn of toll road projects to be delivered in the next three years. As mentioned before, these toll road projects will be positive for the company up to the completion date if there are no delays given the large size of the contracts and their high profitability. All in all, we believe these projects will support WSKT s high earnings growth until at least 2017F. We therefore expect the gross margin (excl. JO) to continue to improve to as high as 11.8/11.6% in FY15F/16F from 10.8% in FY14, before normalizing at 10.9% in FY17F. 12M Trailing GM Quarterly GM Construction GM Gross margin ex.jo Operating margin Net margin 13% 12% 11% 10% % % 8% % 6% % 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q F 2016F 2017F 4

5 5 March 2015 On a cautionary note, however, it should be noted that the biggest risk from the toll road ventures for WSKT is exit risk which will be seen in 2017F based on the call option timeline. If the existing owner won t execute their option, WSKT will be left holding its majority ownership in the toll road project. Hence, WSKT would consolidate the toll road assets thereby limiting the company s balance sheet capacity whilst its profitability would also drop due to the incurrence of toll road depreciation expenses once the toll road is completed. Ample order book to support growth From 2010 until 2013, WSKT maintained its order book conversion to revenues (burn rate) at above 55%, which means WSKT s project profile is less than two years. However, in 2014, with some major projects in its order book, WSKT s burn rate has declined to only 38%, with the projects profile increased to 2.6 years. As WSKT started 2015 with Rp17.8tn of carry-over projects, we view this trend favorably in view of the company s earnings visibility going forward. Accordingly, we set our new contracts target in FY15F in line with the management s guidance as we believe the target is reasonable given the expected increase in government infrastructure spending. We estimate total new contracts in FY15F to reach Rp22.4tn (vs. guidance of Rp20.8tn), or flat growth compared to FY14 s achievement given some special projects awarded in Exhibit 7. Multi-year projects offer good earnings visibility Exhibit 8. IDR17.8tn of carry-over projects to Order Book burn rate, % Order Book burn rate, year (RHS) F 2016F IDR tn Carry-over New contracts Carry-over ratio, x (RHS) F 2016F The balance sheet is not a problem, especially with the capital injection in 3Q14F WSKT had total interest bearing debts of Rp3.1tn as of December 2014, significantly higher than the Rp1.6tn/1.9tn in December 2012/13. After its IPO in late-2012, WSKT continued to gear up following its growing order book size. In 2014, WSKT s peak gearing reached 1.1x, yet still much lower than its peak level pre-ipo of above 3x. 5

6 5 March 2015 Exhibit 9. Manageable working capital kept gearing low Working capital T/O, days Gearing (RHS) Net gearing (RHS) Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 The government s plans to inject capital into WSKT will provide the company with the ability to leverage its balance sheet to take on significantly more projects. The management hinted that for every additional Rp1tn of equity, WSKT balance sheet could take up to Rp20tn of additional new projects in its order book. As the government has set aside Rp3.5tn for WSKT s capital injection in order to maintain its 67% ownership, we can conclude that WSKT s rights issue will result in Rp5.2tn of additional equity. The company plans to execute its rights issue plan in 3Q14F at the soonest. Hence, post-rights issue, WSKT will have the largest equity size among its peers with total equity of Rp8.6tn by December 2015F. With the proceeds, WSKT is targeting to triple its new contracts target to Rp71tn in FY15F. WSKT targets to acquire majority ownership in other financially-halted toll road projects using similar schemes as its latest toll roads acquisition in PPTR and KKDM. The company targets the last interconnection of Central Java toll roads in the Pemalang-Batang and Batang-Semarang sections, as well as sections in the West Java toll road in Ciawi-Sukabumi. Moreover, WSKT also plans a JV with other parties to join the toll roads tender in several sections. All in all, the company might possible take up to Rp46tn of toll projects, if the rights issue is well executed. The equity proceeds coupled with the company s currently huge outstanding bank facility will support the financing during the construction stage, we believe. Exhibit. 10 Waskita s toll roads proposal Section Owner % Length Investment km IDR tn Pemalang-Batang Pemalang Batang Toll Road Majority Batang-Semarang Marga Setiapuritama Majority Ciawi-Sukabumi Trans Jabar Tol Majority Penajam-Balikpapan New project initiation Majority Manado-Bitung Tender in preparation Minority Pandaan-Malang Tender in preparation Minority Pasir Koja-Soreang Tender in preparation Minority Balikpapan-Samarinda Tender in preparation Minority TOTAL

7 5 March 2015 Exhibit 11. WSKT s outstanding loan facility Facility Working capital Non-cashloan Interest rate Debt Equitycovenant Dec-14 IDR bn IDR bn % x IDR bn Indonesia Eximbank Bank Mandiri 800 3, Bank BNI 1,200 3, Bank BRI 300 1, BPD Jabar Banten Bank Panin JIBOR Bank UOB Indonesia Bonds Bonds TOTAL 5,050 8,321 3,117 Capturing the opportunity; Upgrade TP to Rp2,100 We roll over our Target Price to 2016F as we believe WSKT s earnings visibility from its order book remains sound with the ongoing projects in the pipeline. We estimate WSKT s earnings to grow by 26% CAGR in FY14-16F on the back of a combination of larger order book size (20% CAGR) as well as margins improvement from the contribution of higher margin toll road projects. We believe that potential earnings upside still exists as we haven t incorporated the potential rights issue proceeds that will drive earnings higher in FY16F, even though potential earnings dilution might still occur in FY15F. Worth noting is that, among its peers, WSKT still has the lowest portion of foreign ownership, thus inflows on the back of Indonesia s infrastructure story should attract foreigners to WSKT as well. Incorporating the latest FY14 result, we revise up our earnings estimates by 5%/9% for FY15F/ 16F. Utilizing the sector s up-cycle target PE of 25.9x (1.5sd above the sector mean) with FY16F earnings, we raise our Target Price to Rp2,100. We reiterate WSKT as one of our Top Picks in our Indonesia construction universe. BUY. Exhibit 12. Changes in our forecast (IDR bn) Current Previous Changes, % F 2016F 2017F 2015F 2016F 2017F 2015F 2016F 2017F New contracts 22,371 22,433 24,140 26,818 21,572 23,371 24, Order book 32,793 40,251 47,502 53,582 40,589 48,268 53,861 (0.8) (1.6) (0.5) Revenues 10,287 13,209 16,944 20,328 13,707 16,946 19,524 (3.6) (0.0) 4.1 Gross profit - ex. JO 1,109 1,554 1,968 2,220 1,510 1,792 2, Operating profit 875 1,245 1,543 1,753 1,168 1,368 1, Net profit Gross margin - ex. JO Operating margin Net margin

8 5 March 2015 Exhibit 13. WSKT has the second lowest foreign ownership after ADHI 22.5 WIKA PTPP ADHI WSKT Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Source: Bloomberg 8

9 5 March 2015 Exhibit 14. Profit and loss (IDR bn) F 2016F 2017F Revenues 9,687 10,287 13,209 16,944 20,328 COGS 8,776 9,178 11,656 14,975 18,107 Gross profit 911 1,109 1,554 1,968 2,220 Income from JO Gross profit incl. JO 1,012 1,306 1,813 2,235 2,506 Operating expenses (340) (431) (568) (692) (754) Operating profit ,245 1,543 1,753 Net interest (70) (140) (270) (328) (357) Other income (expenses) Pre-tax income ,215 1,395 Income tax (243) (254) (329) (422) (507) Net profit Core profit Exhibit 15. Balance sheet (IDR bn) F 2016F 2017F Cash & equivalent 1,120 1,675 1, Trade receivables 1,710 2,307 2,753 3,531 4,236 Project receivables 3,944 4,954 5,989 7,664 9,181 Inventories ,064 Other current assets ,031 1,316 1,574 Total Current Assets 7,781 10,524 11,478 14,350 16,778 LT investments 570 1,363 1,785 2,102 2,438 Fixed assets ,114 1,325 Other assets Total Non-current Assets 1,007 2,018 2,697 3,249 3,796 TOTAL ASSETS 8,788 12,542 14,176 17,599 20,573 ST loans 875 1,917 1,800 2,400 3,800 Trade payables 2,291 2,572 3,176 4,081 4,935 Current portion of LT loans ,174 - Other current liabilities 2,261 3,239 3,769 4,829 5,829 Total Current Liabilities 5,427 7,728 8,745 12,484 14,564 LT loans 748 1,246 1, Other liabilities ,172 1,416 Total Non-current Liabilities 978 1,965 2,086 1,172 1,416 Capital stock 1,794 1,854 1,854 1,854 1,854 Retained earnings ,450 2,048 2,699 Other equity Total Equity 2,383 2,849 3,345 3,943 4,594 TOTAL LIABILITIES AND EQUITY 8,788 12,542 14,176 17,599 20,573 9

10 5 March 2015 Exhibit 16. Cash flow (IDR bn) F 2016F 2017F Pretax profit ,215 1,395 Tax (462) (305) (459) (586) (653) Depreciation Changes in W/C (495) (217) (327) (545) (420) Cash Flow from Operation (293) Capex (228) (292) (380) (415) (454) Investments (253) (968) (247) (317) (336) Others (2) (8) Cash Flow from Investing (483) (1,268) (626) (732) (790) ST loans (297) 1,042 (117) 600 1,400 Current portion of LT loans ,174 (1,174) LT loans (72) (1,174) - Equity Dividend (20) (110) (150) (194) (238) Cash Flow from Financing (288) 1,504 (340) 407 (12) Change in Cash (1,064) 555 (655) (61) (237) Exhibit 17. Key Ratios F 2016F 2017F Profitability, % Gross margin - excl. JO Gross margin - incl. JO Operating margin EBITDA margin Net margin Core margin ROAE ROAA Leverage Debt to equity, % Net debt to equity, % Interest coverage, x Turnover, days Trade receivables Inventories Trade payables Growth, % Revenues Operating profit EBITDA Net profit Core profit

11 5 March 2015 DISCLAIMER The information contained in this report has been taken from sources which we deem reliable. However, none of P.T. Danareksa Sekuritas and/or its affiliated companies and/or their respective employees and/or agents makes any representation or warranty (express or implied) or accepts any responsibility or liability as to, or in relation to, the accuracy or completeness of the information and opinions contained in this report or as to any information contained in this report or any other such information or opinions remaining unchanged after the issue thereof. We expressly disclaim any responsibility or liability (express or implied) of P.T. Danareksa Sekuritas, its affiliated companies and their respective employees and agents whatsoever and howsoever arising (including, without limitation for any claims, proceedings, action, suits, losses, expenses, damages or costs) which may be brought against or suffered by any person as a results of acting in reliance upon the whole or any part of the contents of this report and neither P.T. Danareksa Sekuritas, its affiliated companies or their respective employees or agents accepts liability for any errors, omissions or mis-statements, negligent or otherwise, in the report and any liability in respect of the report or any inaccuracy therein or omission therefrom which might otherwise arise is hereby expresses disclaimed. The information contained in this report is not be taken as any recommendation made by P.T. Danareksa Sekuritas or any other person to enter into any agreement with regard to any investment mentioned in this document. This report is prepared for general circulation. It does not have regards to the specific person who may receive this report. In considering any investments you should make your own independent assessment and seek your own professional financial and legal advice. 11