Delays in Toll Road Divestment of PT Waskita Karya (Persero) Tbk (WSKT) & Material Use Restrictions
PT Waskita Karya (Persero) Tbk (WSKT), working through its subsidiary PT Waskita Toll Road with 72.63% ownership had planned to divest the 10 toll roads in two investment packages in the PINA program. However, the plan was delayed because incoming offers from prospective investors were disappointing, and did not meet the anticipated target: the price was below expectations. In addition, there is an issue that may affect the precast concrete industry: the use of construction materials originating with a subsidiary, including precast concrete, is only to be allowed to total a maximum 50%.
WSKT Sentiment Depresses WSBP Share Price
Since the sentiment of a delay in toll road divestment conducted by the parent company on September 12, 2017, WSBP share price weakened, slipping -8.63%. When the information concerning the material use restriction issue circulated, WSBP stock price fell -6.53%. Since the beginning of the year the share price of WSBP has decreased by -31.74% YTD. We consider that the information in circulation directly reflects the stock price of WSBP, although the growing issue is addressed to the holding company.
Should We Worry about The Sentiment?
We visited WSBP and met directly with WSBP management, who assured us that the sentiments do not affect payments to WSBP. This is based on the fact that the funds used for the payment of each project to WSBP are already prepared by WSKT before the project is completed. Most of the projects undertaken by WSBP are turnkey (payments will be paid when the project is done), which carries a larger profit margin. We see that the information currently circulating is a short-term negative sentiment. This is based on a statement from management that WSBP's financial condition is still healthy and growing, and is not affected by the issue circulating about the parent company and not yet clear about the restriction of material use. Since we have not received any clarification from the Government, we believe that the fundamental condition of WSBP remains solid, supported by: 1) Low Debt-to-Equity Ratio (DER) at a level of 0.53x (as of 1H17), thus indicating more space for increased WSBP leverage in the future; 2) EPS of WSBP shows a strengthening trend of CAGR of +26.55% not proportional to current stock price weakness; 3) Price to Earnings (P/E), current P/E ratio is at 10.99x lower than competitor; 4) WSBP is still optimistic with revenue reaching Rp7.75 trillion or growing by 64.30% in FY17E, net profit targeted amounted to Rp1.13 trillion, for an increase of 78% from the realization of net income in FY16.
Valuation and Recommendation: Maintain BUY with TP: Rp690
With this situation, we still maintain a positive outlook on the positive growth prospects of WSBP’s financial performance, along with a positive growth industry sector in the future. In addition, support from share buyback action can be a catalyst that can encourage the growth of WSBP stock price. We also believe that this moment represents good momentum for investors to accumulate WSBP shares. We recommend BUY for WSBP with target price / TP: Rp690. With that price target, it implies PE17E/FY18F of 16.91x-11.60x PBV17E/PBV18F of 2.26x-1.99x.
