Serene, Until The Moment is Back
3Q18 Result: Positive Performance, while New Contracts still Below Target
The construction players reported a positive performance along 3Q18. Revenues were observed to increase an average by 20.67% YoY (vs 61.30% YoY in 3Q17), reflecting 64.03%/63.00% of the MNCS/Consensus target. Meanwhile, average net income increased to 18.76% YoY (vs 96.22% YoY in 3Q17), reflecting 63.86%/58.27% of the MNCS/Consensus target. Although it continues to grow, we assess the performance of the construction sector beginning to slow down, as a result of few contracts secured in 3Q18 only 39.47% of the companies target. Construction companies are thus currently focusing on projects acquired in a previous period.
Threats and Opportunity in Political Year
Historically, incumbent tends to indulge in populist expenditures ahead of general elections. In doing so, it reveals a tendency to starve the infrastructure budget, shifting funds to the subsidy budget–particularly energy subsidies, which were observed to increase by 90.83% YoY in FY07-FY08 and 53.16% YoY in FY12-FY13. Infrastructure development tends to trend downward and stagnate in a political year, as indicated by a -5.74% YoY decrease in new contract value during the FY09 election. However, the value of new contracts was observed to recover gradually post-election, up by 10.59%/48.66% YoY in FY10/FY11 YoY, reviving attractiveness of the construction sector. The same trend occurred in FY17, where new contract value stagnate by 1.27% YoY. Thus we project new contract growth to stagnate in FY18E to FY19F, with just +0.15% YoY in FY19F, as there will be an election in FY19F. New contract value is expected to rise again in FY20F/FY21F, along with the development of infrastructure as an economic driver.
Funding issues Persist a Main Focus
Funding is still a major challenge in the construction sector, as the APBN has not been able to raise cash for all PSN projects, signifying money has to be sought from three institutions: 1) Government, with a portion of 12.50%; 2) SOEs at 29.97%; 3) The private sector at 57.51%. In its effort to realize PSN construction, the Government has set aside IDR525 trillion in funds from the state budget.
NEUTRAL Recommendations with Selected Stock: PTPP and WSBP
We consider that construction sector growth will be relatively limited from FY18E until 1H19F, due to: 1) Limited infrastructure funding ahead of elections; 2) FDI, as one of the funding sources, not having shown a significant increase; 3) Volatility of the Rupiah exchange rate. We thus maintain a NEUTRAL rating for the construction sector, with PTPP (BUY TP; IDR 2,050) and WSBP(BUY TP; IDR 500) as top picks.
