Construction Sector Update 21 January 2021

CONSTRUCTION SECTOR UPDATE

In the Sweet Spot

New Contract Target Revised Down during Covid-19

•  The realization of new contracts indicates a slowdown in FY20. This is reflected by the average achievement of new contracts, lower by -12.34% YoY, or reaching 90.42% of the FY20 target.
•  WIKA leads the achievement of new contracts reaching 107% of the target, followed by WSKT 100%, ADHI 87%, and PTPP 67%. However, the achievement has been revised from the previously of 30% -50% in FY20.
•  The decline in new contracts has begun in FY19 (-18.73% YoY) due to a political year, as government's focus shifted to increasing social funds. Besides, the decline in the infrastructure budget also occurred in FY20 (-28.67% YoY) in line with the government's focus on the prevention of Covid-19.

Government sets IDR414 tn Budget: Focuses Recovery Efforts on Infrastructure

•  The government hopes that infrastructure will drive Indonesian economic in FY21E by increasing the APBN infrastructure budget to IDR414 trillion (+47.28% YoY).
•  This budget is mainly intended to support special economic zones (SEZs) and tourism, which will be channeled through the Ministry of PUPR amounting to IDR149.8 trillion or an increase of 98.15% YoY in FY21F.
•  Given the pandemic in FY20, we believe that the growth in the value of new contracts will reach its peak in FY23F-FY24F, so that the postponed tenders in FY20 can be realized in FY21E.

Good News! 5 Countries seeks to invest in Indonesian SWF

•  Indonesia's commitment through the SWF called the Indonesia Investment Authority (INA) has the potential to attract investment through foreign direct investment (FDI) as an effort to develop infrastructure.
•  SWF is still in the stage of establishing a supervisory board and a board of directors, each of which contains 5 members. The Minister of Finance Sri Mulyani as chairman and Minister of BUMN Erick Thohir as a member of the supervisory board, and 3 members namely Yozua Makes, Darwin Cyril Noerhadi, and Haryanto Sahari.
•  SWF is also expected to be realize in 1Q21. First phase will be focused on toll road funding, especially in Java. Furthermore, it is hoped that in 2Q21E-3Q21E it can be invested in airports and 4Q21E for seaports.
•  Several countries have also prepared funding, such as: 1) US IDFC (International Development Finance Corporation) worth USD2 billion; 2) Japan Bank International Cooperation (JBIC) worth USD4 billion; 3) Abu Dhabi Investment Authority (ADIA) UAE worth USD22.8 billion; 4) Canada worth USD4 billion.
•  SWF also has the potential to attract Saudi Arabia-Qatar, this is due to the delay in the investment made by Saudi Arabia and Qatar in Indonesia in FY17 worth USD500 million triggered by diplomatic conflicts. It is noted that the Public Investment Fund (PIF) of Saudi Arabia manages USD320 billion in funds, while the Qatar Investment Authority (QIA) manages the funding of USD335 billion.
•  We believe that SWF will benefit the construction sector, such as: 1) SWF will become a new source of financing and support the divestment of assets; 2) New contracts have the potential to increase along with the sustainability of infrastructure development.

OVERWEIGHT Recommendation for the Construction Sector

We upgrade the recommendation from NEUTRAL to OVERWEIGHT outlook for Construction sector in FY21F. We believe SWF sentiment could be a turn around story for this year. We see opportunities in the long run in line with the government's priorities, although Covid-19 still become a main risk. Moreover, the valuation is relatively low with current PBV stood at -1 to 0 STD PBV (5 years average). Our preferred stocks are ADHI IJ (BUY; TP: IDR1,980), PTPP IJ (BUY; TP: IDR2,600) WSKT IJ (BUY; TP: IDR2,000) and WIKA IJ (BUY; TP: IDR2,400).

Disclaimer On

ADHI, WIKA, PTPP, WSKT, WIKA