Construction Sector Driven by Government Spending
The focus of government to accelerate infrastructure development through the 2015-2019 National Mid-term Development Plan (RPJMN), positively affects the construction sector. This sector’s growth in recent years parallels the trend of Indonesian economic growth, with average growth of CAGR FY12-FY18E of around 20%, the result of government spending for infrastructure, a budget that keeps increasing - around 20% in the last 5 years. The government projected the budget need for 2015-2019 infrastructure development at Rp 4,796 trillion. Therefore, the infrastructure budget kept increasing, along with rising state income through tax revenues and budget efficiency. Further, the government also encourages investors to directly invest in infrastructure developments, taking into account that in 2017 Indonesia achieved ‘Investment Grade’, which makes Indonesia worth investing in, especially in the infrastructure sector.
Key Investment 2017/2018
Growth in construction sector can be seen from the increasing new contract value by the state-owned construction companies, with CAGR growth (2013-2017F) reaching 25%. This directly affects the financial performance of those companies with CAGR growth (2013-2017) with revenue amounting to 16% YoY and net profit of 25% YoY. Several state-owned construction companies are consistently able to show financial performance above 100%. The projects from the government provide a positive contribution to the Company’s financial performance.
Investment Risks: Concerns about Funding Issues
The main issue in the construction sector is funding. If a construction company gets many projects with high project value, yet does not have enough funds on hand for construction, the project will not run smoothly. Therefore, it is important for the construction sector to have sufficient funding to run a business.
OVERWEIGHT Outlook with Top Picks: PTPP, WIKA, and WSKT
We believe that in 2017 the construction sector will experience an increase, caused by several supporting factors, such as: 1) Low share price of state-owned construction companies, which does not reflect its positive financial performance, 2) Low Debt-to-Equity Ratio (DER), 3) The availability of Non-state Budget Infrastructure Funding (PINA) which can function as an alternative scheme for infrastructure funding, 4) Support from government regulations which accelerate infrastructure development. Recommendation: OVERWEIGHT with Top Picks: PTPP (BUY; TP: Rp 4500)WIKA (BUY; TP: Rp 3250) and WSKT (BUY; TP: Rp 3160).
