2/16 3/16 4/16 5/16 6/16 7/16 8/16 9/16 1/16 11/16 12/16 1/17 2/17 (WIKA IJ) 4Q16 review: Catapulting higher Construction Company Report February 27, 217 (Maintain) Buy Target Price (12M, IDR) 3,2 Share Price (2/24/17, IDR) 2,5 Expected Return 28.% Consensus OP (17F, IDRtr) 2.3 EPS Growth (17F, %) 34.6 P/E (17F, x) 11.3 Industry P/E (17F, x) 14.6 Benchmark P/E (17F, x) 15.7 Market Cap (IDRbn) 22,424.9 Shares Outstanding (mn) 8,97. Free Float (mn) 3,132.9 Institutional Ownership (%) 7.6 Beta (Adjusted, 24M) 1.1 52-Week Low (IDR) 2,37 52-Week High (IDR) 3,139 (%) 1M 6M 12M Absolute 1.2-16.9 3.1 Relative -.6-16.6-12.6 (D-1yr=1) 13 12 11 1 9 8 PT. Mirae Asset Sekuritas Indonesia Property JCI Franky Rivan +62-21-515-114 franky@miraeasset.co.id WIKA For 4Q, (WIKA) delivered another strong earnings performance, continuing its robust 216 performance. The company s revenue, gross profit, operating profit, and net profit for the quarter jumped 14.5%, 66.5%, 72.9%, and 16.2% YoY, respectively (see Table 1). Notably, while WIKA s FY16 revenue was in line with our estimate, net profit beat our forecast by 52.5% (see Table 2). Overall, we judge WIKA s headline results to be in accordance with our bullish view on builders earnings. (Please refer to our construction report Brighter light in the horizon for more details.) Record-high margins We ascribe WIKA s satisfactory earnings delivery to the company s margin improvement, as well as the solid performance of its property business. For FY16, WIKA s gross margin and net margin expanded to 14.2% and 6.5%, respectively (FY15: 12.1% and 4.6%), marking 1-year highs (see Figures 3 and 4). The margin expansion was attributable to the performance of WIKA s largest business segment, i.e. the infrastructure segment, which contributed 47.7% to total FY16 revenue (see Figure 7). For FY16, WIKA s infrastructure gross margin and net margin expanded to 14.9% and 5.2%, respectively (FY15: 12.1% and 3.7%). We ascribe the margin expansion to reduced order book exposure to regional government projects in 216. Notably, WIKA had stopped servicing most regional government projects in 214 due to their low profitability (gross margin: around 5%), instead choosing to focus on central government projects (gross margin: 1%). As we expect WIKA s 217 order book to have minimal exposure to regional government projects, we believe margins will continue to be strong going forward. Property segment to continue to gain traction The better-than-expected earnings were also driven by around IDR25bn in gains on land plot sales by Wika Realty (85.41% stake). Stripping away one-off gains, WIKA would have delivered 4Q16 net profit of roughly IDR36.3bn (+148.7% QoQ, +53.6% YoY) and FY16 net profit of IDR762bn (+22% YoY); notably, the latter figure is still greater than our full-year estimate of IDR663.6bn (114% achievement). We think Wika Realty will make a greater earnings contribution going forward, as it has been given the opportunity to develop several Transit Oriented Development (TOD) areas along the Jakarta-Bandung High-Speed Railway (HSR) route. The company is set to acquire around 4ha land in Bandung, around 1,ha in Waringin, and roughly 15ha in Halim, all of which are adjacent to the HSR route. In a recent conversation, WIKA s management revealed that land prices for its TOD sites could appreciate by around 2% within several months of acquisition. Hence, we are optimistic on WIKA s chances of posting additional one-off land disposal gains this year. We would also like to highlight that, in FY16, WIKA s property division saw its gross margin and net margin expand significantly to 23.2% and 13.4%, respectively (FY15: 16.6% and 5.1%). We remain optimistic on the prospects for ongoing margin strength at WIKA s property segment. FY (Dec) 12/14 12/15 12/16 12/17F 12/18F Revenue (IDRbn) 12,463.2 13,62.1 15,668.8 24,619.7 32,494.6 OP (IDRbn) 1,31.7 1,225.5 1,7.2 2,417.2 2,515.7 OP Margin (%) 8.3 9. 1.9 9.8 7.7 NP (IDRbn) 68.2 625. 1,11.8 1,362.2 1,416.4 EPS (IDR) 99.1 11.8 164.8 221.9 23.7 BPS (IDR) 794.3 885.8 2,35.8 2,34.6 2,567.1 P/E (x) 25.2 24.6 15.2 11.3 1.8 ROE (%) 12.5 11.5 8.1 9.6 9. Note: All figures are based on consolidated data; OP refers to operating profit Source: Bloomberg, Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
February 27, 217 Table 1. WIKA s 4Q16 earnings review (IDRbn, %) 4Q15 1Q16 2Q16 3Q16 4Q16 QoQ YoY Revenue 5,528.6 2,726.6 3,37.1 3,35.5 6,329.5 91.5 14.5 Cost of revenue -4,853. -2,434.9-2,868.6-2,918.8-5,219.5 78.8 7.6 Share of JV profit 11.5 29.8 83.5 66.8 198.7 197.2 79.9 Gross profit after JO profit 786.1 321.6 522. 453.6 1,38.7 188.5 66.5 Operating expenses -14.8-87. -14.5-16.5-193. 81.3 37.1 Operating profit 645.3 234.6 381.6 347.2 1,115.7 221.4 72.9 Net non-operating gains (losses) -2.5 14.4 13.2 2.4-78.1 NM 281.5 Interest expense -168.2-76.9-94.6-92.1-171.7 86.5 2.1 Pretax profit 456.7 172.1 3.1 257.5 865.9 236.3 89.6 Tax expense -174.6-77.9-88.7-92.3-189.5 15.3 8.5 Net profit 282.1 94.2 211.4 165.2 676.4 39.5 139.8 Minority interests -47.5-22.5-26.5-2.3-66. 225.8 39. Attributable net profit 234.5 71.7 184.9 144.9 61.3 321.2 16.2 Table 2. WIKA s FY16 performance relative to full-year estimates (IDRbn, %) FY16 Mirae Asset FY16F Achievement % Consensus FY16F Achievement % Net revenue 15,669 15,871 98.7 17,722 88.4 Gross profit 2,66 2,1 129.7 2,165 12.4 Operating profit 2,79 1,534 135.6 1,725 12.5 Attributable net profit 1,12 664 152.5 793 127.6 Source: Company data, Bloomberg, Larger order book, larger revenue for 217 We expect WIKA to display improvement in 217, as we believe the Jakarta-Bandung HSR (IDR15.6tr contract value), which accounts for the largest chunk of the order book, will begin to see faster revenue recognition this year. We project WIKA to book IDR43.2tr in new contracts in 217, expanding its order book to IDR91.1tr. Margin strength is also expected to continue going forward, given the order book s minimal exposure to regional government projects. Thus, we revise up our 217 and 218 revenue estimates for WIKA to IDR24.6tr and IDR32.4tr, respectively. Figure 1. State-owned builders new contract growth, FY16 Figure 2. State-owned builders new contract achievement, FY16 (IDRtr) (%) 8 FY15 (L) FY16 (L) YoY change (R) 14 7 12 6 1 5 8 4 6 3 4 2 1 2 (IDRtr) (%) 8 FY16 (L) FY16 target (L) FY16 achievement (R) 2 7 18 16 6 14 5 12 4 1 3 8 6 2 4 1 2 WSKT WIKA PTPP ADHI WSKT WIKA PTPP ADHI Note: Targets at beginning of 216 Note: Targets at beginning of 216 2
February 27, 217 Figure 3. WIKA s gross margin performance through the years Figure 4. WIKA s net margin performance through the years (%) 16 14 12 1 9.5 1.5 14.2 12.2 11.1 11.4 9.9 9.7 (%) 7 6 5 4 4.7 4.6 4.8 4.8 4.9 4.6 6.5 8 6 7.7 7.9 8.1 8.4 6.8 3 2.9 2.6 3.1 3. 2.4 2.9 4 2 2 1 24 25 26 27 28 29 21 211 212 213 214 215 216 24 25 26 27 28 29 21 211 212 213 214 215 216 Figure 5. WIKA s revenue performance through the years Figure 6. WIKA s net profit performance through the years (IDRbn) 18, (IDRbn) 1,2 16, 14, 15,668.8 1, 1,11.8 12, 8 1, 8, 6 6, 4 4, 2, 2,476.2 2 71.7 24 25 26 27 28 29 21 211 212 213 214 215 216 24 25 26 27 28 29 21 211 212 213 214 215 216 Figure 7. WIKA s FY16 revenue breakdown Figure 8. WIKA s seasonality 1% Q4 Q3 Q2 Q1 21.% 12.9% Infrastructure and building 47.7% Energy and industrial plant Industry 9% 8% 7% 6% 5% 4% 18.3% Realty and property 3% 2% 1% % 211 212 213 214 215 216 3
February 27, 217 Maintain Buy; Upgrade TP to IDR3,2/share We maintain our Buy recommendation on WIKA while upgrading our target price to IDR3,2/share from IDR3,55/share. Our target price revision reflects: 1) expectations for continued margin strength, thanks to lower exposure to regional government projects; and 2) greater revenue recognition in 217 for the Jakarta-Bandung HSR project (IDR15.6tr contract value). Our DCF-based target price reflects a 5% perpetual growth rate, a 5% market risk premium, a 7.5% risk-free rate, a 1.126 beta, and a 11.6% WACC. WIKA is currently trading at 11.3x 17F P/E, slightly below the five-year average -1 standard deviation level (12.1x). Figure 9. WIKA s 17F PE band 35 ( x ) 3 +2 Std Dev 25 +1 Std Dev 2 Avg P/E 15-1 Std Dev 1 5-2 Std Dev 2/12 2/13 2/14 2/15 2/16 2/17 Source: 4
February 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 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 losses (gains) 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 Source: Company data, Mirae Asset Daewoo Research estimates 5
February 27, 217 APPENDIX 1 Important Disclosures & Disclaimers Disclosures As of the publication date, PT Daewoo Securities Indonesia, 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% * Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * 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 Daewoo Securities, 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. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Mirae Asset Daewoo Co., Ltd. ( Mirae Asset Daewoo ) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein. Disclaimers This report is published by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. 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The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. 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