4/16 5/16 6/16 7/16 8/16 9/16 1/16 11/16 12/16 1/17 2/17 3/17 4/17 (WIKA IJ) 1Q17 review: Prizing the overachiever Construction Company Report April 27, 217 (Maintain) Buy Target Price (12M, IDR) 3,2 Share Price (4/26/17, IDR) 2,33 Expected Return 37.3% Consensus OP (16F, IDRtr) 2.4 EPS Growth (16F, %) 34.6 P/E (16F, x) 1.5 Industry P/E (16F, x) 14.4 Benchmark P/E (16F, x) 16.4 Market Cap (IDRbn) 2,9. Shares Outstanding (mn) 8,97. Free Float (mn) 3,132.9 Institutional Ownership (%) 69.8 Beta (Adjusted, 24M) 1. 52-Week Low (IDR) 2,37 52-Week High (IDR) 3,139 (%) 1M 6M 12M Absolute -5.3-5.1-7.3 Relative -8.1-1.8-26.3 (D-1yr=1) JCI WIKA 13 95 6 (WIKA) delivered another strong earnings performance in 1Q17, continuing its robust 216 performance. For the quarter, the company witnessed a jump in each of its revenue (+39.9%), gross profit (+41.4%), operating profit (+43.9%), and net profit (+242% YoY) (see Table 1). WIKA s 1Q17 top and bottom line met 15.5% and 18% of our full-year estimate, respectively (see Table 2), which was above the seasonal run-rate of c.1~13% in the first quarter. Overall, we judge WIKA s headline results to be in line with our bullish outlook for the construction sector in 217 (please refer to our construction report Brighter light in the horizon for more details). Easy capital raising to continue superb new contract achievement We believe WIKA s superb new contract achievement in 1Q17 was the key reason behind its strong earnings print. In 1Q17, WIKA was the highest new contract achiever among other state-owned enterprises (SOEs) by booking IDR17tr worth of new contracts (+182.6% YoY; 39.4% of FY17 target; see Figure 1 and 2). Its most notable new contracts were Cengkareng-Batu Ceper-Kunciran toll road, Trans Park Cibubur, and 1x1 MW Cilacap power plant. We believe this would highlight the company s outstanding ability in winning tenders as compared to its competitors. It is worth noting that by end-216, WIKA is among state-owned builders having the highest net cash position (.2x net cash vs..1x industrial net debt; see Figure 3), which we believe would allow the company to leverage its book more than competitors. With a larger capital base, the company would be able to participate in more tenders, hence resulting in a higher probability of winning, in our view. We argue that the shortfall in the government s budget had reduced the government s participation recently (please refer to our construction report The glass if half full for more details). Due to this, builders having a larger ability to raise capital should be more independent from slower government participation in infrastructure projects, in our view. We like WIKA as its leverage position was still very comfortable at.1x net cash as of 1Q17. Thus, we expect more capital raising via debt to continue on the horizon in order to allow the company to participate in more tenders and win more sizable new contracts going forward. Jacked by interest income: Only temporary Another factor causing the surge in WIKA s net profit was its soaring interest income of IDR62bn as of 1Q17 (+275.7% YoY; vs. IDR16.5bn in 1Q16). The largest part seems to have come from WIKA s IDR8.7tr rights issue cash, which was temporarily preserved in the bank. With more sizable projects which execution is in the pipeline, we expect the company to withdraw the cash anytime soon. Having said that, we see a little chance of another significant net profit jump coming from interest income in the future. PT. Property Franky Rivan +62-21-515-114 (ext. 124) franky@miraeasset.co.id FY (Dec.) 12/13 12/14 12/15 12/16 12/17F 12/18F Revenue (IDRbn) 11,884.7 12,463.2 13,62.1 15,668.8 24,619.7 32,494.6 Operating profit (IDRbn) 954.9 1,31.7 1,225.5 1,7.2 2,417.2 2,515.7 OP Margin (%) 8. 8.3 9. 1.9 9.8 7.7 Net profit (IDRbn) 569.9 68.2 625. 1,11.8 1,362.2 1,416.4 EPS (IDR) 92.8 99.1 11.8 164.8 221.9 23.7 BPS (IDR) 511.4 794.3 885.8 2,35.8 2,34.6 2,567.1 P/E (x) 25.1 23.5 22.9 14.1 1.5 1.1 P/B (x) 4.6 2.9 2.6 1.1 1..9 ROE (%) 18.2 12.5 11.5 8.1 9.6 9. ROA (%) 4.5 3.8 3.2 3.3 3.4 2.9 Note: Net profit refers to net profit attributable to controlling interests PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
April 27, 217 Table 1. WIKA s 1Q17 earnings review (IDRbn, %) 1Q16 2Q16 3Q16 4Q16 1Q17 QoQ YoY Revenue 2,726.6 3,37.1 3,35.5 6,329.5 3,813.4-39.8 39.9 Cost of revenue -2,434.9-2,868.6-2,918.8-5,219.5-3,4.9-34.8 39.7 Gross profit 291.8 438.5 386.8 1,11. 412.5-62.8 41.4 Operating expenses -87. -14.5-16.5-193. -117.9-38.9 35.5 Operating profit 24.8 298.1 28.3 917. 294.7-67.9 43.9 Net non-operating gains (losses) 14.4 13.2 2.4-78.1 56.2-171.9 291.1 Interest expense -76.9-94.6-92.1-171.7-119.2-3.6 55. Share of JV profit 29.8 83.5 66.8 198.7 147.6-25.7 395.1 Pre-tax profit 172.1 3.1 257.5 865.9 379.2-56.2 12.4 Tax expense -77.9-88.7-92.3-189.5-114. -39.8 46.4 Net profit 94.2 211.4 165.2 676.4 265.2-6.8 181.6 Minority interests -22.5-26.5-2.3-66. -2.1-69.6-1.7 Attributable net profit 71.7 184.9 144.9 61.3 245.1-59.8 242. Table 2. WIKA s 3M17 performance relative to full-year estimates (IDRbn, %) 3M17 Mirae Asset FY17F Achievement % Consensus FY17F Achievement % Net revenue 3,813 24,62 15.5 23,222 16.4 Gross profit 413 3,245 12.7 3,7 13.7 Operating profit 295 2,417 12.2 2,41 12.3 Attributable net profit 245 1,362 18. 1,22 2.1 Source: Company data, Bloomberg, Research Maintain Buy and TP of IDR3,2 We maintain our Buy recommendation and target price of IDR3,2 for WIKA as: 1) WIKA s 1Q17 earnings was in line with our estimate and 2) we believe the company s ability to raise debt shall bode continuity for its strong new contract signing throughout the year. WIKA is our top-pick investment within the construction space. Our DCF-based target price reflects a 5% perpetual growth rate, a 5% market risk premium, a 7.5% risk-free rate, a 1.12x beta, and a 11.6% WACC. WIKA is currently trading at 1.5x 17F P/E, below its -1 standard deviation of 12.3x. Figure 1. State-owned builders new contract growth, 1Q17 (IDRtr) 1Q16 (L) 1Q17 (L) YoY change (R) (%) 18 2 Figure 2. State-owned builders new contract achievement, 1Q17 (IDRtr) (%) 1Q17 (L) FY17 target (L) FY17 achievement (R) 9 45 16 14 182.6 18 16 8 7 39.4 4 35 12 1 8 6 4 2 126.3 58.3 6.9 14 12 1 8 6 4 2 6 5 4 3 2 1 1.8 16.5 17.1 3 25 2 15 1 5 WSKT WIKA PTPP ADHI WSKT WIKA PTPP ADHI Note: targets at 217 inception 2
April 27, 217 Figure 3. Net gearing position across construction companies Figure 4. WIKA s quarterly revenue breakdown performance (x) 2. WSKT WIKA PTPP ADHI TOTL Sector (IDRbn) 7, Realty and property Industry Energy and industrial plant Infrastructure and building 1.5 6, 1. 5,.5 4,. 3, -.5 2, -1. 1, -1.5 12/12 12/13 12/14 12/15 12/16 12/17F 12/18F Figure 5. WIKA s 3M17 revenue contributors Figure 6. WIKA s seasonality 1% Q4 Q3 Q2 Q1 17.3% 3.7% Infrastructure and building Energy and industrial plant 9% 8% 7% 6% 12.5% 66.4% Industry Realty and property 5% 4% 3% 2% 1% % 211 212 213 214 215 216 Figure 7. WIKA s 17F PE band 35 ( x ) 3 +2 Std Dev 25 +1 Std Dev 2 Avg P/E 15-1 Std Dev 1-2 Std Dev 5 4/12 4/13 4/14 4/15 4/16 4/17 Source: Research 3
April 27, 217 (WIKA IJ/Buy/TP IDR3,2) Income Statement (Summarized) Balance Sheet (Summarized) (IDRbn) 12/15 12/16 12/17F 12/18F (IDRbn) 12/15 12/16 12/17F 12/18F Revenue 13,62 15,669 24,62 32,495 Cash and equivalents 2,56 9,27 7,369 6,378 Cost of revenue -11,965-13,442-21,375-28,97 Account receivables 2,782 2,73 5,184 6,842 Gross profit 1,655 2,227 3,245 3,525 Retention receivables 663 832 1,455 1,92 Operating expenses -429-527 -828-1,9 ST due from customers 3,244 3,971 6,239 8,235 Operating profit 1,226 1,7 2,417 2,516 Inventories 1,31 1,248 2,732 3,72 Interest expense -431-435 -555-546 Other current assets 2,28 3,51 5,16 6,728 Profit (loss) from joint venture 288 379 517 77 Fixed assets 3,184 3,466 3,914 4,56 Net non-operating gains (losses) 16-48 58-5 Other long-term assets 3,858 6,78 8,173 1,466 Pre-tax profit 1,98 1,596 2,438 2,627 Total assets 19,62 31,97 4,172 48,776 Tax expense -395-448 -863-93 Account payables 4,323 4,68 6,847 9,28 Net profit 73 1,147 1,575 1,697 Short-term debt 1,796 5,388 3,222 3,647 Minority interest -78-135 -213-281 Other short-term liabilities 4,479 4,538 7,916 1,61 Attributable net profit 625 1,12 1,362 1,416 Long-term debt 1,646 1,289 4,688 5,37 Other long-term liabilities 1,921 2,73 3,349 4,171 Growth (%) 12/15 12/16 12/17F 12/18F Total liabilities 14,164 18,598 26,22 33,16 Revenue 9.3 15. 57.1 32. Paid in capital 1,646 2,182 2,182 2,182 Cost of revenue 8.4 12.3 59. 35.5 Additional paid in capital 716 6,542 6,542 6,542 Gross profit 16.2 34.6 45.7 8.6 Retained earnings 2,13 2,628 3,623 4,658 Operating expenses 9.2 22.8 57.1 21.9 Total equity attributable to majority 4,375 11,352 12,347 13,382 Operating profit 18.8 38.7 42.2 4.1 Non-controlling interest 1,63 1,147 1,82 2,378 Interest expense 118.2.9 27.4-1.6 Total shareholders' equity 5,438 12,499 14,149 15,761 Net non-operating gains (losses) NM NM NM NM Pre-tax profit -3.6 45.3 52.8 7.8 Tax expense -.1 13.5 92.5 7.8 Net profit -5.5 63.2 37.3 7.8 Minority interest -42.5 73.6 57.1 32. Attributable net profit 2.8 61.9 34.6 4. Key performance indicators Cash Flow Statement (Summarized) 12/15 12/16 12/17F 12/18F (IDRbn) 12/15 12/16 12/17F 12/18F Per share data Net profit 625 1,12 1,362 1,416 EPS (IDR) 11.8 164.8 221.9 23.7 Depreciation 234 283 277 338 EPS growth (%) 2.8 61.9 34.6 4. Changes in net working capital -698 1,726-5,54-1,159 BVPS (IDR) 885.8 235.8 234.6 2567.1 Operating cash flow 161 3,22-3,415 596 BVPS growth (%) 11.5 129.8 13.2 11.4 PP&E investing activities -742-565 -725-93 DPS (IDR) 2. 64.7 59.7 62.1 I.P investing activities -12-7 -264-232 Key ratio Others investing activities -94-2,15-1,831-2,6 ROE (%) 11.5 8.1 9.6 9. Investing cash flow -848-2,785-2,82-3,223 ROA (%) 3.2 3.3 3.4 2.9 Non-current financing activities 1,1 425 4,45 1,441 Gross profit margin (%) 12.1 14.2 13.2 1.8 Changes in equity -3 6,362 Operating margin (%) 9. 1.9 9.8 7.7 Changes in minority interest 74 84 655 576 Net profit margin (%) 4.6 6.5 5.5 4.4 Dividend paid -123-397 -367-381 Net debt/equity (x).2 -.2..2 Financing cash flow 959 6,474 4,334 1,636 Debt/equity (x).6.5.6.6 Net worth adjustment -12 Assets/equity (x) 3.6 2.5 2.8 3.1 Net cash 259 6,71-1,91-991 Current ratio (x) 1.2 1.5 1.6 1.4 Beginning balance 2,31 2,56 9,27 7,369 Quick ratio (x).5.8.7.6 Ending balance 2,56 9,27 7,369 6,378 estimates 4
April 27, 217 APPENDIX 1 Important Disclosures & Disclaimers Disclosures As of the publication date, PT., and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Stock Ratings Industry Ratings Buy Relative performance of 2% or greater Overweight Fundamentals are favorable or improving Trading Buy Relative performance of 1% or greater, but with volatility Neutral Fundamentals are steady without any material changes Hold Relative performance of -1% and 1% Underweight Fundamentals are unfavorable or worsening Sell Relative performance of -1% * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst s estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. 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