CONSTRUCTION SECTOR UPDATE
Has The Giant Return?
New Contract Realization Remains Poor, In line with Our Estimates
New contracts realization in 9M20 reached 36.49%/73.23% of the companies/MNCS target in FY20E, or in line with our estimate. Most of our construction players (4 big SOEs) adjusted their forecast for new contracts during the Covid-19 Outbreak by cutting 40%-50% from the previously target in FY20E. In the previous report (click here) we estimated that there will be a decline in new contracts by 50%-80% in FY20E. WSKT led the highest new contracts, with the amount reaching IDR12.2 trillion, followed PTPP at IDR11.8 trillion, ADHI at IDR10 trillion, and WIKA at IDR9.26 trillion. Furthermore, construction players (exclude WSKT IJ) have released their 9M20 performance and posted a saddening top-line and bottom-line by -28.56%/-95.61% YoY, respectively. The decline in financial performance due to: 1) Delays in several projects that lowered the current burn rate by 20%-35%; 2) Increase in finance cost to 11.67% YoY (exclude WSKT IJ) in 9M20; 3) Shorter working days in July-August 2020.
SWF is Coming!
The newly passed Ombinus Law stipulates the establishment of an Indonesian SWF (Sovereign Wealth Fund) under the supervision of the Ministry of Finance. We believe the SWF mainly intended to attract FDI and support the economy amid the pandemic, which provide a positive impact especially for SOEs in FY21F. The government will inject an estimated initial capital of IDR75 trillion with IDR30 trillion coming from cash, state assets, shares in state-owned enterprises, and state receivables. In the first phase, SWF is expected to be able to raise IDR225 trillion. So far the UAE, IDFC (International Development Finance Corporation) and Softbank are committed to provide USD52 billion. We believe that SWF will benefit the construction sector as: 1) SWF would become a new source of financing and support asset-recycling especially on SOE contractors (WSKT, WIKA, PTPP) given its highly leveraged balance sheet; 2) New contracts will potentially increase along with the sustainability of infrastructure development. We consider the realization of SWF to be quite coveted by SOEs contractors as the maturity debt worth to IDR91.28 trillion from FY20E to FY24F.
Infra Budget is Set to Rise in FY21F
The government hopes that infrastructure will drive economic improvement in FY21F. This is reflected in the increase in the RAPBN infrastructure budget worth to IDR414 trillion, an increase of 47.28% YoY in FY21F. This budget will mainly addressed to support special economic zones (SEZs) and tourism, which will be disbursed to the Ministry of PUPR amounting to IDR149.8 trillion, an increase of 98.15% YoY in FY21F. We note that this strategy is in line with the PSN’s (national strategic project) rule of thumb where every IDR1 trillion project has the potential to absorb 14 thousand new workers. The 2020-2024 RPJMN targets would be able to absorb 4 million workers/year with an aggregate of 19 million workers up to FY24F.
OVERWEIGHT Recommendation for the Construction Sector
We upgrade our recommendation from NEUTRAL to OVERWEIGHT outlook for Construction sector in FY21F. We see SWF as a positive catalyst for the construction sector along with the government's priorities. Valuation wise, construction players are currently trade at 0.3x-0.8x PBV or -1 to -1.5 STD pbv in the 3 years. Our preferred stocks are ADHI IJ (BUY; TP: 790), PTPP IJ (BUY; TP:1,160) WSKT IJ (BUY; TP: Rp930) and WIKA IJ (BUY; TP: Rp1350). Key downside risks to our rating are: 1) Longer than expected Covid-19 Outbreak; 2) Global economic outlook still worsening.
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