Adhi Karya Company Focus

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1 Dec 9, 14 Adhi Karya Company Focus Maria Renata Cheapest infra proxy A story of the fallen angel Backed by disappointment from several default projects in the past, investors put a discount on ADHI share price. ADHI experienced its golden period in mid 7 to beginning 8, when ADHI was traded at average PE of 27.5x, backed by high expectation on high earnings. When ADHI missed the target, due to project stopped, investors put a discount to ADHI s share price. Now ADHI is traded at ~37%-57% discount to others listing SOE construction companies compared to historical discount of ~21%-47% (since WSKT s public listing on 19 Dec 12 until now). We believe the PE gap would be narrowed in conformity to ADHI s order book growth. Waiting for two mega-projects to be kicked off Low of new contracts obtained backed by delay on projects kick-off, such as: 1) JLT Project (Jakarta Link Transportation), a straddle type monorail project with route: Bekasi Timur Cawang, Cibubur Cawang, and Cawang Kuningan worth ~USD9mn (~Rp1.8tr); still awaiting Presidential Decree, 2) Development of Halim Perdana Kusuma Airport together with Lion Group; investment needed approximately Rp5.tr; awaits court ruling on the dispute between Lion Group and Angkasa Pura II regarding the airport operator. Both projects will be included on AD- HI s order book after the groundbreaking. Lowering FY14 targets due to low new contracts obtained We lower our targets in ADHI. ADHI s new contracts reached only Rp5.3tr as of Oct 1 or 36% lower than last year achievement at Rp8.3tr. With the two months remaining, its would be hard for ADHI in achieving above Rp1.tr. Hence, we lower our new contracts target by ~45%% to Rp9.4tr (-% YoY). Consequently, we expect flattish growth on revenues (+2.7% YoY to Rp1.tr) and net income in 14 (+2.2% YoY to Rp415bn). Valuation: Maintain Buy with TP: Rp35 (19% upside) We use PEG multiple to value 4 listing SOE contractors in order to justify company s ability in capturing the robust outlooks in infrastructure. We use assumptions: 1) PEG multiple at 1.x, and 2) Earnings CAGR (15-18) of 12.9%, to arrive at our new price target at Rp35 (old: Rp255). Our target translate into 13.1x 15 PE, now ADHI is traded at 11.x 15PE. The cheapest among 4 SOE construction companies. Companies Data Year end Dec F 15F 16F Sales (Rpbn) 7,628 9,8 1,61 11,756 13,483 Net Profit (Rpbn) EPS (Rp) EPS Growth (%) DPS (Rp) BVPS (Rp) ,17 1,216 1,437 P/E (x) Div Yield (%) The Company is a stateowned company that provides construction services as well as the mechanical electrical and also property development. BUY Company Update Share Price Sector Rp3,5 Rp2,945 Construction Price Target Rp3,5 (+19%) Stock Data Reuters Code ADHI.JK Bloomberg Code ADHI.IJ Issued Shares (m) 1,81 Mkt Cap (Rpbn) 5,467 Avg. Value Daily 6 month (Rpm) Rp Wk range Rp3,4/Rp1,425 Major Shareholders Republic of Indonesia 51.% Public 49.% Consensus EPS 14F 15F Consensus (Rp) TRIM vs Cons. (%) Stock Price 4, 3,5 3, 2,5 2, 1,5 1, 5 Volum e Price - - Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 14,, 1,, 1,, 8,, 6,, 4,,,, PT Trimegah Securities Tbk - COMPANY FOCUS 1

2 Valuation We also use PEG multiple to value ADHI, same with other SOE construction companies. Our assumptions are: 1) PEG multiple at 1.x, and 2) Earnings CAGR (15-18) of 12.9%. We arrive at new price target Rp35 (old: Rp255), equivalent to 13.1x 15PE. Currently ADHI is traded at 11.x 15PE. The cheapest among 4 SOE construction companies. Figure 1. Valuation Target PEG x 1. Earnings CAGR15-18 % 12.9% Fair price Rp/sh 3,464 Target price Rp/sh 3,5 Current price Rp/sh 2,945 Potential upside/downside % 18.8% Net income Rp bn Growth (% YoY) % 91.9% 2.2% 16.4% 12.3% 14.6% 11.8% EPS - fully diluted Rp/sh Current PE x PEG x Why ADHI s PE discount should narrow A story of the fallen angel ADHI average historical forward PE since IPO on Mar 4 until now stands at 1.4x versus +STDEV at 16.6x and peak valuation at 35.x (on 26 Oct 7). ADHI s golden period was in mid 7 to beginning 8, when ADHI was traded at average forward PE of 27.5x. Shares price was at that time lifted up by high earnings expectation from Jakarta Monorail project. ADHI booked Rp72.1bn of receivables (A/R) from Jakarta Monorail (JM) as of Dec 6, while the bills had not been paid but the construction went on until the A/R hit Rp15.4bn as of Dec 8. However, the project has encountered financial problems which cost ADHI huge impairment expenses of Rp147bn (vs. Rp22bn in 7). The huge impairment cost not merely from JM but also from other projects. Another ADHI s default project was Doha City Centre Project in Doha, Qatar. The project start in 6 with realization value of the work as of Dec 8 amounted to USD64.8mn, or ~Rp79.2bn at that time, in which ~USD44.5mn of the bills had been paid, resulting unpaid A/R of ~Rp237bn. However, ADHI s shares price dropped since then in anticipation of lower net income due to high impairment cost. PT Trimegah Securities Tbk - COMPANY FOCUS 2

3 Figure 2. Impairment expense jumped significantly since (1) () (3) Impairment exp. (Rp bn) Net income (Rp bn) (1) (2) (4) (7) (22) (51) (96) (112) (147) (65) (226) Source: Company, TRIM Research Figure 3. Investor s excitement met disappointment high expectaon from Jakarta Monorail Mar-4 Mar-5 Mar-6 Mar-7 Mar-8 Mar-9 Mar-1 Mar-11 Mar-12 Mar-13 Mar x 1.4 x 4.2x Hence, since 8 forward ADHI is traded at average PE of 7.8x or ~4% discount to WIKA at 13.1x. Both PTPP and WSKT were not listing yet in 8. Figure 4. ADHI PE band starting in x 7.8 x 3.4 x Sep-14 Jun-14 Mar-14 Dec-13 Sep-13 Jun-13 Mar-13 Dec-12 Sep-12 Jun-12 Mar-12 Dec-11 Sep-11 Jun-11 Mar-11 Dec-1 Sep-1 Jun-1 Mar-1 Dec-9 Sep-9 Jun-9 Mar-9 Dec-8 Sep-8 Jun-8 Mar-8 Dec-7 PT Trimegah Securities Tbk - COMPANY FOCUS 3

4 Expect ADHI s discount to industry leaders to narrow ADHI currently trades at ~48% discount versus historically ~31% discount (since WSKT s public listing on 19 Dec 12). We think ADHI can re-rate near the historical discount as ADHI gains more contract in 15 (we expect 19.7% order book growth in 15 vs. 9.8% in 14) and as investors look for value among SOE construction companies. Note that among SOE construction companies, ADHI is most reliant on government projects from public works ministry. Hence, it was the most affected when public works ministry slowed down infrastructure works this year but should be the largest beneficiary of government s infrastructure push starting next year. Figure 5. ADHI PE band starting in Dec x 1.9x 8.4x Nov-14 Oct-14 Sep-14 Aug-14 Jul-14 Jun-14 May-14 Apr-14 Mar-14 Feb-14 Jan-14 Dec-13 Nov-13 Oct-13 Sep-13 Aug-13 Jul-13 Jun-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13 Dec-12 Note: ADHI is the first listing SOE construction with IPO date on 18 Mar 4 and followed by WIKA on 29 Oct 7, PTPP on 9 Feb 1, and WSKT on 19 Dec 12. Figure 6. PE band since Dec 12 for 4 SOE construction companies WIKA PTPP WSKT ADHI 5 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 PT Trimegah Securities Tbk - COMPANY FOCUS 4

5 Figure 7. Changes in forecast Old New Chg (%) (in Rp bn) New contracts 17,11 19,666 9,435 11, % -42.4% Carry over 8,923 16,916 8,923 1,648.% -37.1% Order book 26,25 36,583 18,359 21, % -39.9% Revenues 12,31 16,283 1,61 11, % -27.8% Op. profit 1,196 1, ,98 -.2% -3.1% Net income % -27.7% 15 targets We expect new contracts growth of +.% YoY to Rp11.3tr, resulting revenues and earnings growth of +16.9% YoY and +16.4% YoY, respectively. Figure 8. Assumptions Rp bn Rp bn % YoY Rp bn % YoY Rp bn % YoY New contracts 11,794 9,435 -.% 11,322.% 12,454 1.% Carry over 8,56 8, % 1, % 12, % Order book,354 18, % 21, % 25, % Revenues breakdown Construction service 7,3 7,711 7.% 9, % 1, % EPC 1,891 1, % 1, % 2, % Property & real estate % % % Pre-cast nm % % Others - -.% -.% -.% Total Revenues 9,8 1,61 2.7% 11, % 13, % Revenues contributor Construction service 73.5% 76.6% 78.5% 78.5% EPC 19.3% 16.4% 15.% 15.% Property & real estate 7.2% 5.1% 4.7% 4.7% Pre-cast.% 1.8% 1.9% 1.9% Others.%.%.%.% Total Revenues 1.% 1.% 1.% 1.% Gross profit - before JO 1,193 1,4.9% 1, % 1, % Net revenues fr JO % % % Op. profit % 1,98 15.% 1, % Net income % % % PT Trimegah Securities Tbk - COMPANY FOCUS 5

6 Figure 9. Order book Carry over (Rp tr) New contracts (Rp tr) Source: Company, TRIM Research Figure 1. Order book, revenues, and net income Revenues (Rp tr) Order Book (Rp tr) Net income (Rp bn) Source: Company, TRIM Research Figure 11. Management forecast and ours ADHI - beginning ADHI - revised TRIM Research FY14F FY14 FY14F FY15F (in Rp bn) Rp bn %YoY Rp bn % YoY Adj. Rp bn Var. %YoY Rp bn %YoY New contracts 21,1 78.9% 15, % -27.8% 9, % -.% 11,322.% Carry over 7, % 7, %.% 8, % 4.2% 1, % Order book 28, % 22, % -.5% 18, % -9.8% 21, % Revenues 14,7 5.% 1,488 7.% -28.7% 1,61-4.1% 2.7% 11, % Op. profit na na 1,123 na na 955 na 3.9% 1,98 15.% Source: Net income TRIM Research % % -25.3% % 2.2% % Source: Company, TRIM Research PT Trimegah Securities Tbk - COMPANY FOCUS 6

7 Income Statement (Rpbn) Year end Dec F 15F 16F Revenue 7,628 9,8 1,61 11,756 13,483 Revenue Growth (%) Gross Profit 956 1,193 1,4 1,43 1,69 Opr. Profit ,98 1,259 EBITDA ,19 1,272 EBITDA Growth (%) Net Int Inc/(Exp) (81) (75) (124) (159) (194) Gain/(loss) Forex Other Inc/(Exp) (36) (239) (113) (134) (154) Pre-tax Profit Tax (21) (36) (31) (318) (365) Minority Int Extra. Items Reported Net Profit Core Net Profit growth (%) (.7) Dividend per share growth (%) (1.6) (27.9) Dividend payout ratio Balance Sheet (Rpbn) Year end Dec F 15F 16F Cash and equivalents 949 1,94 1,466 1,468 1,34 Other curr asset 6,334 7,16 7,578 9,4 1,236 Net fixed asset Other asset Total asset 7,872 9,721 9,821 11,414 12,696 ST debt Other curr liab 5,652 6,33 6,145 6,855 7,588 LT debt 748 1,497 1,496 1,996 1,623 Other LT Liab Minority interest Total Liabilities 6,691 8,172 7,979 9,214 1,98 Shareholders Equity 1,174 1,539 1,832 2,191 2,588 Net (debt) / cash () (231) ,73 Total cap employed 2,123 3,248 3,546 4,441 4,876 Net Working capital 1,431 2,558 2,681 3,362 3,198 Debt 949 1,79 1,714 2,25 2,288 Cash Flow (Rpbn) Key Ratio Analysis Year end Dec F 15F 16F Year end Dec F 15F 16F Core Net Profit Depr / Amort Chg in Working Cap (216) (94) (84) (11) (116) Others (124) (236) (118) CF's from oprs Capex (375) (57) (656) (667) (581) Others (4) (1) (1) (1) CF's from investing (379) (57) (656) (668) (582) Net change in debt Others (18) (42) (122) (124) (145) CF's from financing (117) Net cash flow (474) 2 (128) Cash at BoY ,94 1,466 1,468 Cash at EoY 949 1,94 1,466 1,468 1,34 Free Cashflow (357) (49) (144) Profitability Gross Margin (%) Opr Margin (%) EBITDA Margin (%) Core Net Margin (%) ROAE (%) ROAA (%) Stability Current ratio (x) Net Debt to Equity (x) (.) (.2) Net Debt to EBITDA.2 (.) (.2).2.6 (x) Interest Coverage (x) Efficiency A/P (days) A/R (days) Inventory (days) Interim Result (Rpbn) 3Q13 4Q13 1Q14 2Q14 3Q14 Capital History Date Revenues 2,326 4,144 1,44 1,753 1,998 Gross Profit Opr. Profit Net profit Gross Margins (%) Opr Margins (%) Net Margins (%) Mar-4 IPO@Rp15 PT Trimegah Securities Tbk - COMPANY FOCUS 7

8 PT Trimegah Securities Tbk Gedung Artha Graha 18 th Floor Jl. Jend. Sudirman Kav Jakarta 1219, Indonesia t f DISCLAIMER This report has been prepared by PT Trimegah Securities Tbk on behalf of itself and its affiliated companies and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. This report has been produced independently and the forecasts, opinions and expectations contained herein are entirely those of Trimegah Securities. While all reasonable care has been taken to ensure that information contained herein is not untrue or misleading at the time of publication, Trimegah Securities makes no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided solely for the information of clients of Trimegah Securities who are expected to make their own investment decisions without reliance on this report. Neither Trimegah Securities nor any officer or employee of Trimegah Securities accept any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. Trimegah Securities and/or persons connected with it may have acted upon or used the information herein contained, or the research or analysis on which it is based, before publication. Trimegah Securities may in future participate in an offering of the company s equity securities.