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26 Juni 2020

Construction Sector Update 26 June 2020

CONSTRUCTION SECTOR UPDATE

 

Waiting for Further Confirmation

 

Covid-19 Pandemic Likely to Delay New Contract

New contract realization in 1Q20 reached 7.71%/32.99% of the companies’ targets/MNCS in FY20E. Most of our construction players (the big 4 SOE's) shows a negative new contract growth by -40.54% YoY on average in 1Q20. Furthermore, construction players (exclude WSKT IJ) have released their 1Q20 performance and posted a saddening top line and bottom line by -11.67%/-64.32% YoY, respectively.  

 

Leverage is still the Main Focus: Continued Access to Funds may be Impacted

During Covid-19 outbreak, the global economic was sluggish and causing further impact in all sectors. The construction stock movement was merely euphoria caused by stimulus from the Indonesian government by issuing fiscal stimulus and large-scale social restrictions (PSBB) easing in June 2020. However, we believe that this only temporary increase as market still fear of a deeper contraction in domestic economy followed by the low estimation of the country’s GDP. Amidst daily changes, project participants are working to mitigate Covid-19 impacts including delays, increased costs and an inability to perform contract obligations. Therefore, balance of payment will be a concern in FY20E as the DER level for ADHI IJ, PTPP IJ and WIKA IJ are at 1.76x/1.25X/1.04x in 1Q20, while WSKT IJ DER stood at 2.37x in FY19. Moreover, Fitch downgraded WSKT IJ to BBB+ from A, whereas Pefindo downgraded ADHI IJ, PTPP IJ, and WSKT IJ to negative from stable in June 2020. We consider that there will be no major infrastructure projects within the next two years (FY20E-FY21F), other than the capital city relocation, as the realization of new contracts were sluggish in 1Q20. We also note that market should pay attention for some challenges and risks include: 1) Infrastructure acceleration policies; 2) IDR fluctuation; 3) The uncertainty of the economy.

 

Future Contract will be Sluggish due to The Government Focus on Covid-19

SOE's new contract will potentially tumbled by 50%-80% in FY20E, which is due to hampered project tenders. Covid-19 forces the government to reallocate and refocus their budget for battle Covid-19 as the Ministry of Finance announced that the New Capital Infrastructure Budget was diverted to handle Covid-19. Furthermore, Indonesian GDP only grew by 2.97% YoY followed by a sharply drop in new contract (-50.71% YoY in 1Q20). However we estimate new contract of SOE’s contractors will be recovered on average to level 70%-80% in FY21F. This includes delaying tenders which will be rechecked to see which projects are prioritised.

 

NEUTRAL Recommendation for the Construction Sector

We maintain a NEUTRAL outlook for the construction sector in FY20E, despite the opportunities arising from the construction of a new capital city. This is due to our assessment of the tight competition from limited tenders. Besides, the slow-down economy forecast became our consideration due to infrastructure funding diversion towards public consumption, to maintain national macroeconomic growth. Moreover, divestment is also a key alternative to maintaining the company's cash flow in FY20E. Our preferred stocks are WIKA IJ (HOLD; TP: IDR1,290) and PTPP IJ (HOLD; TP: IDR870).

 

Disclaimer On

ADHI, PTPP, WIKA, WSKT

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