Adhi Karya Company Focus

Dec 9, 14 Adhi Karya Company Focus Maria Renata (maria.renata@trimegah.com) 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 12 13 14F 15F 16F Sales (Rpbn) 7,628 9,8 1,61 11,756 13,483 Net Profit (Rpbn) 212 46 415 483 542 EPS (Rp) 117 225 23 268 31 EPS Growth (%) 16.2 91.9 2.2 16.4 12.3 DPS (Rp) 33 23 68 69 8 BVPS (Rp) 652 855 1,17 1,216 1,437 P/E (x) 25.1 13.1 12.8 11. 9.8 Div Yield (%) 4.5 3.4 2.9 2.4 2. 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) Rp61.5 52-Wk range Rp3,4/Rp1,425 Major Shareholders Republic of Indonesia 51.% Public 49.% Consensus EPS 14F 15F Consensus (Rp) 194 223 TRIM vs Cons. (%) 18.7. 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 - www.trimegah.com COMPANY FOCUS 1

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% 13 14 15 16 17 18 Net income Rp bn 46 415 483 542 622 695 Growth (% YoY) % 91.9% 2.2% 16.4% 12.3% 14.6% 11.8% EPS - fully diluted Rp/sh 225 23 268 31 345 386 Current PE x 13.1 12.8 11. 9.8 8.5 7.6 PEG x 1. 1..9.8.7.6 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 - www.trimegah.com COMPANY FOCUS 2

Figure 2. Impairment expense jumped significantly since 8 5 4 3 1 - (1) () (3) Impairment exp. (Rp bn) Net income (Rp bn) 46 166 189 182 212 7 78 96 112 37 81 (1) (2) (4) (7) (22) (51) (96) (112) (147) (65) (226) 3 4 5 6 7 8 9 1 11 12 13 Source: Company, TRIM Research Figure 3. Investor s excitement met disappointment 4 35 3 25 high expectaon from Jakarta Monorail 15 1 5 Mar-4 Mar-5 Mar-6 Mar-7 Mar-8 Mar-9 Mar-1 Mar-11 Mar-12 Mar-13 Mar-14 16.6 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 8 35 3 25 15 1 5 12.1 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 - www.trimegah.com COMPANY FOCUS 3

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 12 18 16 14 12 1 8 6 4 2 13.4 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 35 3 25 15 1 WIKA PTPP WSKT ADHI 5 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 4

Figure 7. Changes in forecast Old New Chg (%) (in Rp bn) 14 15 14 15 14 15 New contracts 17,11 19,666 9,435 11,322-44.8% -42.4% Carry over 8,923 16,916 8,923 1,648.% -37.1% Order book 26,25 36,583 18,359 21,97-29.5% -39.9% Revenues 12,31 16,283 1,61 11,756-18.3% -27.8% Op. profit 1,196 1,571 955 1,98 -.2% -3.1% Net income 57 668 415 483-18.1% -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 13 14 15 16 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 8,923 4.2% 1,648 19.3% 12,743 19.7% Order book,354 18,359-9.8% 21,97 19.7% 25,197 14.7% Revenues breakdown Construction service 7,3 7,711 7.% 9,227 19.7% 1,583 14.7% EPC 1,891 1,652-12.6% 1,758 6.4% 2,16 14.7% Property & real estate 75 514-27.1% 551 7.3% 632 14.7% Pre-cast - 184 nm 2 19.7% 252 14.7% Others - -.% -.% -.% Total Revenues 9,8 1,61 2.7% 11,756 16.9% 13,483 14.7% 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% 1,43 16.5% 1,69 14.7% Net revenues fr JO 55 87 58.8% 88 1.4% 11 14.7% Op. profit 919 955 3.9% 1,98 15.% 1,259 14.7% Net income 46 415 2.2% 483 16.4% 542 12.3% PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 5

Figure 9. Order book Carry over (Rp tr) New contracts (Rp tr) 4 35 3 25 15 16.3 14.8 13.5 18.2 17.6.4 18.4 22. 25.2 28.3 31.5 1 5-8 9 1 11 12 13 14 15 16 17 18 Source: Company, TRIM Research Figure 1. Order book, revenues, and net income Revenues (Rp tr) Order Book (Rp tr) Net income (Rp bn) 35. 3. 25.. 15. 1. 5.. 31.5 28.3 25.2 22. 695.4 18.2 17.6 18.4 622 16.3 14.8 542 13.5 483 46 415 17.1 15.4 81 166 189 182 212 13.5 11.8 9.8 1.1 7.7 6.6 5.7 6.7 7.6 8 9 1 11 12 13 14 15 16 17 18 8 7 6 5 4 3 1 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% 15,228 29.1% -27.8% 9,435-38.% -.% 11,322.% Carry over 7,547-11.8% 7,547-11.8%.% 8,923 18.2% 4.2% 1,648 19.3% Order book 28,647 4.7% 22,775 11.9% -.5% 18,359-19.4% -9.8% 21,97 19.7% Revenues 14,7 5.% 1,488 7.% -28.7% 1,61-4.1% 2.7% 11,756 16.9% Op. profit na na 1,123 na na 955 na 3.9% 1,98 15.% Source: Net income TRIM Research 571 4.5% 427 5.1% -25.3% 415-2.7% 2.2% 483 16.4% Source: Company, TRIM Research PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 6

Income Statement (Rpbn) Year end Dec 12 13 14F 15F 16F Revenue 7,628 9,8 1,61 11,756 13,483 Revenue Growth (%) 13.9 28.5 2.7 16.9 14.7 Gross Profit 956 1,193 1,4 1,43 1,69 Opr. Profit 792 919 955 1,98 1,259 EBITDA 799 934 963 1,19 1,272 EBITDA Growth (%) 42.2 16.8 3.1 15.2 14.7 Net Int Inc/(Exp) (81) (75) (124) (159) (194) Gain/(loss) Forex 18 11 Other Inc/(Exp) (36) (239) (113) (134) (154) Pre-tax Profit 423 714 718 84 911 Tax (21) (36) (31) (318) (365) Minority Int. 2 2 3 3 3 Extra. Items Reported Net Profit 212 46 415 483 542 Core Net Profit 428 53 499 584 658 growth (%) 47.1 17.5 (.7) 16.9 12.7 Dividend per share 33 23 68 69 8 growth (%) (1.6) (27.9) 187.8 2.2 16.4 Dividend payout ratio 32.2. 3. 3. 3. Balance Sheet (Rpbn) Year end Dec 12 13 14F 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 187 271 363 453 541 Other asset 42 35 413 489 579 Total asset 7,872 9,721 9,821 11,414 12,696 ST debt 1 212 217 254 79 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 91 134 1 18 97 Minority interest 7 9 9 9 9 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) 248 783 1,73 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 12 13 14F 15F 16F Year end Dec 12 13 14F 15F 16F Core Net Profit 428 53 499 584 658 Depr / Amort 7 15 8 11 13 Chg in Working Cap (216) (94) (84) (11) (116) Others 318 357 (124) (236) (118) CF's from oprs 537 78 299 258 437 Capex (375) (57) (656) (667) (581) Others (4) (1) (1) (1) CF's from investing (379) (57) (656) (668) (582) Net change in debt 257 76 5 537 162 Others (18) (42) (122) (124) (145) CF's from financing 239 718 (117) 412 17 Net cash flow 397 991 (474) 2 (128) Cash at BoY 552 949 1,94 1,466 1,468 Cash at EoY 949 1,94 1,466 1,468 1,34 Free Cashflow 162 273 (357) (49) (144) Profitability Gross Margin (%) 12.5 12.2 12. 11.9 11.9 Opr Margin (%) 1.4 9.4 9.5 9.3 9.3 EBITDA Margin (%) 1.5 9.5 9.6 9.4 9.4 Core Net Margin (%) 2.8 4.1 4.1 4.1 4. ROAE (%) 18. 26.4 22.6 22. 21. ROAA (%) 2.7 4.2 4.2 4.2 4.3 Stability Current ratio (x) 1.2 1.4 1.4 1.5 1.4 Net Debt to Equity (x) (.) (.2).1.4.4 Net Debt to EBITDA.2 (.) (.2).2.6 (x) Interest Coverage (x) 9.2 8.5 6.7 6.3 6. Efficiency A/P (days) 189 19 19 19 A/R (days) 52 52 52 52 52 Inventory (days) 5 6 5 5 5 Interim Result (Rpbn) 3Q13 4Q13 1Q14 2Q14 3Q14 Capital History Date Revenues 2,326 4,144 1,44 1,753 1,998 Gross Profit 232 649 131 139 192 Opr. Profit 171 55 7 59 121 Net profit 112 226 16 44 41 Gross Margins (%) 1. 15.7 9.1 7.9 9.6 Opr Margins (%) 7.4 12.2 4.8 3.4 6.1 Net Margins (%) 4.8 5.5 1.1 2.5 2.1 18-Mar-4 IPO@Rp15 PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 7

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