(WSKT IJ) Never-ending capital recycling Construction Company Report September 26, 2017 (Upgrade) Trading Buy Target Price (12M, IDR) 2,200 Share Price (9/25/17, IDR) 1,865 Expected Return 18.0% Consensus OP (17F, IDRtr) 4.8 EPS Growth (17F, %) 51.8 P/E (17F, x) 8.3 Industry P/E (17F, x) 14.3 Benchmark P/E (17F, x) 16.9 Market Cap (IDRbn) 25,315.3 Shares Outstanding (mn) 13,573.9 Free Float (mn) 4,610.2 Institutional Ownership (%) 72.6 Beta (Adjusted, 24M) 0.9 52-Week Low (IDR) 1,785 52-Week High (IDR) 2,740 (%) 1M 6M 12M Absolute -17.1-23.6-29.6 Relative -16.8-29.4-39.0 Digging out of one debt hole just to fall into another Previously, we recommended Hold on (WSKT) due to our concern over its huge dependency on capital recycling. We also believe the company s sizable turnkey projects should create a continuous need for capital to be raised more quickly compared to other projects; we note that WSKT s days of receivable are the longest in the industry (WSKT=341 days vs. industry=288.4 days as of 2016; see Figures 2 and 3). Although WSKT has expressed confidence in its ability to provide cash for its projects in 2018 as its current turnkey projects will have finished (please refer to our Flash Focus Key takeaways from WSKT analyst meeting for more details), we are suspicious of this claim, given that the projects in WSKT s pipeline will still be turnkey-based, based on our latest conversation with management. Thus, we think it will be difficult for WSKT to improve its balance sheet position going forward, as cash received is likely to be used for other turnkey projects. It is also worth noting that toll road projects in the pipeline are still enormous (991 km; see Table 1); this reinforces our key concern regarding WSKT s capital recycling. Higher earnings on the horizon, but challenges remain Notwithstanding the above concern, we lift our 2017 revenue and net profit estimates for WSKT to IDR39.9tr and IDR2.6tr, respectively (from IDR30.5tr and IDR2tr previously) given its faster-than-expected revenue recognition. Hence, we also lift our 2018 revenue and net profit estimates to IDR45.7tr and IDR2.9tr, respectively (from IDR34tr and IDR2.2tr previously). The same factor led WSKT s management to increase its revenue target to IDR42-43tr (from IDR38.9tr previously; see Table 3) and its earnings estimate to IDR3.6tr (from IDR2.8tr previously). We tune up our 2017 burn-rate assumption to 36.6% (from 30.5% previously) to reflect our current expectations on the company. However, we keep our new contract estimate of IDR60tr, considering the delay to WSKT s toll road divestment. Hence, we expect continued pressures on its balance sheet, as it has the highest leverage position relative to other builders. Notably, as of 2Q17, WSKT s net gearing and debt-to-equity ratios stood at 1.1x and 1.5x, respectively (see Figures 4 and 5). (D-1yr=100) 120 110 100 90 80 70 10/16 9/16 11/16 12/16 1/17 JCI 2/17 3/17 4/17 WSKT 5/17 6/17 7/17 8/17 WSKT has secured a loan of IDR5tr from Sumitomo, and it is expected to raise IDR3tr in debt from bond issuance in early October. Thus, we estimate the company s debt-to-equity ratio to be around 1.8x, quite close to its internal debt-toequity ratio cap of 2.0x. Even though the company was very optimistic on its divestment plan, we believe we need to see a further significant development on that front before factoring in the potential rise in equity. PT. Property Franky Rivan +62-21-515-1140 (ext.: 124) franky@miraeasset.co.id FY (Dec.) 12/13 12/14 12/15 12/16 12/17F 12/18F Revenue (IDRbn) 9,686.6 10,286.8 14,152.8 23,788.3 39,930.7 45,732.9 Operating profit (IDRbn) 570.5 688.7 1,403.4 3,179.6 4,618.8 5,710.9 OP Margin (%) 5.9 6.7 9.9 13.4 11.6 12.5 Net profit (IDRbn) 368.1 511.9 1,047.7 1,713.3 2,600.7 2,899.6 EPS (IDR) 31.7 44.1 90.2 147.5 223.9 249.6 BPS (IDR) 200.1 238.0 835.3 1,443.9 1,651.3 1,882.6 P/E (x) 58.9 42.3 20.7 12.6 8.3 7.5 P/B (x) 9.3 7.8 2.2 1.3 1.1 1.0 ROE (%) 15.8 18.5 10.8 10.2 13.6 13.3 ROA (%) 4.2 4.1 3.5 2.8 3.1 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.
Valuation call; Upgrade to Trading Buy and Raise TP to IDR2,200 Given our higher earnings estimates for WSKT and the recent plunge in its share price, we upgrade our recommendation on the company to Trading Buy (from Hold) and raise our target price to IDR2,200 (from IDR2,070). Our TP implies a P/E of 8.8x to 2018F earnings. The company s ultra-low valuation currently trading at a 18F P/E of 7.5x, below -2 SD (8.2x) also influenced our upgrade. However, we reiterate our view that key risks to the industry are likely to linger; these include cash payment delays and other difficulties coming from the project owner side (i.e., the government; please refer to our construction report Escalated systematic risk for more details). Figure 1. WSKT s 2018F P/E range ( x ) 19 17 15 13 11 9 7 +2 Std Dev +1 Std Dev Avg P/E -1 Std Dev -2 Std Dev 5 9/13 9/14 9/15 9/16 9/17 Source: Research Table 1. Potential toll road projects in the pipeline (km, IDRtr) Region Routes Length (km) Estimated investment costs (IDRtr) East Java Probolinggo-Banyuwangi 172.0 20.7 Central Java Semarang-Demak 25.0 7.7 Jakarta-West Java Jakarta-Cikampek II 64.0 13.4 West Java Akses Patimban 49.0 5.7 West Java Bandung Utara toll road 27.2 6.3 Central Java Demak-Tuban-Gresik 236.0 63.6 West Java Cileunyi-Tasikmalaya-Cilacap 183.0 58.0 Jakarta-Banten Cawang-Bandara elevated 45.0 21.3 East Java Kertosono-Kediri-Tulungagung 63.4 11.7 West Java Padalarang-Sukabumi 60.6 9.8 East Java Surabaya Eastern Ring Road (SERR) 23.0 9.3 West Java Gedebage-Majalaya 11.8 1.9 Jakarta-Banten Semanan-Balaraja 31.0 6.3 Total 991.0 235.7 Source: Research 2
Table 2. WSKT s toll road concession rights list (km, %) No. Toll roads Length WSKT ownership Completion target 1 Kanci-Pejagan 35 77.69 Operating 2 Pejagan-Pemalang 57 99.99 Sect 1 & 2 : Operating 3 Cimanggis-Cibitung 26 90 2019 4 Ciawi-Sukabumi 54 99.99 2018 5 Pasuruan-Probolinggo 31 80 2018 6 Bekasi-Cawang-Kampung Melayu 21 60 2018 7 Pemalang-Batang 39 60 2018 8 Solo-Ngawi 90 40 2018 9 Ngawi-Kertosono 87 40 2018 10 Cinere-Serpong 10 35 2020 11 Depok-Antasari 22 25 2018 12 Semarang-Batang 75 40 2018 13 Medan-Kualanamu-Tebing Tinggi 62 30 2018 14 Kayu Agung-Palembang-Betung 112 60 2019 15 Krian-Legundi-Bunder-Manyar 38 55 2019 16 Kuala Tanjung-Tebing Tinggi-Parapat 143 30 2019 17 Cileunyi-Sumedang-Dawulan 60 15 2018 18 Cibitung-Cilincing 35 55 2019 Total 997 Source: Company Data, Research Table 3. Change in WSKT s assumptions and forecasts 2017F previous 2017F new Change % 2018F previous 2018F new Change % New contracts 60.0 60.0 0.0 85.0 85.0 0.0 Carry over 65.0 65.0 0.0 74.4 74.4 0.0 Order book 125.0 125.0 0.0 159.4 159.4 0.0 Burn rate (%) 30.5 36.6 6.1 %p 34.0 36.6 2.6 %p Revenue 33.4 39.9 19.6 42.6 45.7 7.4 Operating profit 3.9 4.6 19.6 4.5 5.7 26.5 Net profit 2.0 2.6 28.9 2.2 2.9 33.7 (IDRtr) Figure 2. WSKT s days of receivables performance (days) Days of receivables (L) Gross profit margin (R) (%) Figure 3. Construction industry s days of receivables performance (days) Days of receivables (L) Gross profit margin (R) (%) 350 341.2 339.5 18 350 18 17 306.7 17 300 16 300 288.4 16 257.6 15 15 250 200 164.1 196.0 213.1 220.6 14 13 12 11 250 200 177.0 193.9 183.5 213.6 222.3 14 13 12 11 150 10 150 10 9 9 100 2011 2012 2013 2014 2015 2016 2017F 8 100 2011 2012 2013 2014 2015 2016 2017F 8 3
Figure 4. Builders net gearing ratio Figure 5. Builders debt-to-equity ratio (x) 2.0 WSKT WIKA PTPP ADHI (x) 2.0 WSKT WIKA PTPP ADHI 1.8 1.8 1.6 1.6 1.4 1.4 1.2 1.2 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 0.0 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 4
(WSKT/Trading Buy/TP IDR2,200) 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 14,153 23,788 39,931 45,733 Cash and equivalents 5,522 10,664 3,798 6,207 Cost of revenue -12,232-19,820-33,890-38,460 Account receivables 2,384 2,239 3,758 4,304 Gross profit 1,921 3,968 6,040 7,273 Retention receivables 732 967 1,623 1,858 Operating expenses -518-788 -1,422-1,562 ST due from customers 4,580 10,972 18,417 21,093 Operating profit 1,403 3,180 4,619 5,711 Inventories 826 2,557 4,372 4,961 Interest expense -340-983 -1,010-1,377 Other current assets 1,762 9,484 13,296 14,667 Net revenue from JV 10-7 324 349 Fixed assets 1,923 3,275 4,653 5,433 Net non-operating losses (gains) 325 291 562 338 Other long-term assets 12,580 21,267 34,641 41,019 Pre-tax profit 1,398 2,480 4,495 5,020 Total assets 30,309 61,425 84,557 99,542 Tax expense -350-667 -1,727-1,929 Account payables 5,472 7,362 12,587 14,285 Net profit 1,048 1,813 2,768 3,091 Short-term debt 3,488 15,350 18,416 23,720 Minority interest 0-100 -168-192 Other short-term liabilities 4,705 8,750 14,185 16,162 Attributable net profit 1,048 1,713 2,601 2,900 Long-term debt 4,547 9,890 16,018 19,027 Other long-term liabilities 2,394 3,300 4,167 4,479 Growth (%) 12/15 12/16 12/17F 12/18F Total liabilities 20,605 44,652 65,374 77,672 Revenue 37.6 68.1 67.9 14.5 Paid in capital 1,732 1,853 1,853 1,853 Cost of revenue 33.3 62.0 71.0 13.5 Additional paid in capital 5,882 5,883 5,883 5,883 Gross profit 73.3 106.5 52.2 20.4 Retained earnings 1,933 3,334 5,744 8,431 Operating expenses 23.2 52.2 80.4 9.9 Total equity attributable to majority 9,547 11,070 13,480 16,167 Operating profit 103.8 126.6 45.3 23.6 Non-controlling interest 157 5,704 5,704 5,704 Interest expense 85.2 189.1 2.7 36.4 Total shareholders' equity 9,704 16,773 19,183 21,870 Net non-operating losses (gains) 409.1-10.5 93.5-40.0 Pre-tax profit 82.5 77.4 81.3 11.7 Tax expense 37.7 90.3 159.0 11.7 Net profit 104.8 73.1 52.7 11.7 Minority interest -53.8 NM 67.9 14.5 Attributable net profit 104.7 63.5 51.8 11.5 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 1,048 1,713 2,601 2,900 EPS (IDR) 90.2 147.5 223.9 249.6 Depreciation 140 198 173 219 EPS growth (%) 104.7 63.5 51.8 11.5 Changes in net working capital 4,072 1,862-3,560 1,510 BVPS (IDR) 835.3 1443.9 1651.3 1882.6 Operating cash flow 5,259 3,774 1,264 6,679 BVPS growth (%) 251.0 72.8 14.4 14.0 PP&E investing activities -1,441-1,550-1,550-1,000 DPS (IDR) 8.6 18.0 16.4 18.3 I.P investing activities -422 17-769 -276 Key ratio Others investing activities -10,343-8,704-12,604-6,102 ROE (%) 10.8 10.2 13.6 13.3 Investing cash flow -12,206-10,237-14,923-7,378 ROA (%) 3.5 2.8 3.1 2.9 Non-current financing activities 4,891 6,250 6,995 3,321 Gross profit margin (%) 13.6 16.6 15.1 15.9 Changes in equity 5,861 121 0 0 Operating margin (%) 10.0 13.3 11.6 12.5 Changes in minority interest 151 5,547 0 0 Net profit margin (%) 7.4 7.2 6.5 6.3 Dividend paid -100-210 -191-213 Net debt/equity (x) 0.3 0.9 1.6 1.7 Financing cash flow 10,804 11,709 6,804 3,108 Debt/equity (x) 0.8 1.5 1.8 2.0 Net worth adjustment -21-103 0 0 Assets/equity (x) 3.1 3.7 4.4 4.6 Net cash 3,836 5,143-6,855 2,409 Current ratio (x) 1.2 1.2 1.0 1.0 Beginning balance 1,675 5,511 10,654 3,798 Quick ratio (x) 0.6 0.4 0.2 0.2 Ending balance 5,511 10,654 3,798 6,207 estimates 5
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 20% or greater Overweight Fundamentals are favorable or improving Trading Buy Relative performance of 10% or greater, but with volatility Neutral Fundamentals are steady without any material changes Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening Sell Relative performance of -10% * 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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