PTPP the Chief Port Builder

We initiate coverage on PTPP with a BUY and IDR950 TP, representing a 17% upside to the current share price. Our TP is based on a target of 11.3x PER over the company’s FY14 earnings, at par with its historical average rolling PER. We like PTPP for its strong 20.3% CAGR in earnings between FY10-FY12, but mostly for its familiarity with Indonesian’s Port Authority, which gives it the confidence of achieving a 40% winning rate for upcoming mega-port projects. The company is also restructuring its cost of funds, with the aim of reducing ~300bps from the current rate by FY13.

Cozy relationship with Pelindo boosts orderbook
We expect the company to post a 21% and 18% revenue growth in FY13 and FY14, boosting its top-line from IDR8.4trn in FY12 to IDR10.2trn and IDR12.0trn in FY13 and FY14 respectively. PTPP’s solid orderbook continues to be supported by its expertise in port development and close relationship with the Indonesian Port Authority (Pelindo). It recently won a IDR8.3trn contract for the first stage of development of the “New Priok” port, an IDR22.8trn (USD2.4bn) high-profile multi-year project to be concluded in 2017.

Meanwhile, the Indonesian government is still gearing up to tender out USD1.2bn worth of port projects in 2012 as part of the Public-Private Partnership MP3EI (Indonesia Economic Masterplan 2011-2025) development scheme.

Cost of funds to improve through bonds
Rating agency Pefindo currently rates PTPP at idA-, an improvement from idBBB+ last year. The company plans to issue up to IDR1trn worth of five-year bonds, with the first IDR300bn taking place in 1Q13. It plans to maintain interest-bearing debt at ~1.0x D/E and as such, it aims to restructure its cost of funds to reduce its effective bank loans interest rate from the current 12.8%. We expect the company to achieve a 200-300bps decrease from the current rate (to 9.5%) based on its corporate credit rating.

Strategic rebranding to support expansion
In 2012, PTPP rebranded itself as a company with operations across general constructions, EPC (engineering, procurement and construction), property, and investments. The company plans to spin off its property and EPC businesses as separate subsidiaries. We are also encouraged to learn that the company strategically allocates its investment funds as baits to gain new projects and/or to better control the timing and completion of its projects – all that shows management’s clear direction for PTPP.

Brief History
PT PP (originally named Pembangunan Perumahan, which means Housing Development in Bahasa) was established in 1953 by the government of Indonesia. It was entrusted to build houses for the officers of PT Semen Gresik Tbk (SMGR). Having gained the trust of the authorities, PTPP’s duty was expanded to include the construction of large projects that were related to war compensations the Government of Japan paid to the Republic of Indonesia, namely Hotel Indonesia (the tallest building in the nation at the time of completion), Bali Beach Hotel, Ambarukmo Palace Hotel and Samudera Beach Hotel.

In 1991, PTPP started diversifying its business to include office rentals at Plaza PP and realty development in Cibubur. At the end of 2009, the company underwent an Initial Public Offering (IPO) to become a public company. It listed on the IDX in February 2010.

Valuation and target price
We initiate coverage on PTPP with a BUY and a TP of IDR950, which is 22 % above its current share price. We base this TP on a target of 111.3x PER over its FY14 earnings, at par with its historical average rolling PER. At present, the company is commanding 9.8x over its weekly rolling PER, but we believe that it would follow the FY12 uptrend going into FY13 on the back of positive infrastructure sentiment. We like the PTPP story as the company managed to post a strong 20.3% CAGR in earnings between FY10-FY12.

We also like its familiarity with Pelindo (the Indonesian Port Authority), which gives it the confidence of achieving a 40% winning rate on port development contracts and lends support its orderbook. Driven by a strong balance sheet, the company is also planning to restructure its cost of funds, which we expect to be reduced by ~300bps next year. It has also successfully ventured into the EPC business, which we expect to grow from 8% of total revenue in FY11 to 14%-16% of revenue in FY12-FY13. The company also plans to utilize its excess cash for investments in various projects that are expected to increase the portion of recurring income within its business portfolio.

Solid orderbook growth supported by mega-port projects
As the main beneficiary of the government’s infrastructure push, PTPP’s orderbook has grown by a whopping 40.7% CAGR between FY10-FY12. Revenues have increased five-fold within the same period while earnings grew by 20.3% CAGR. We expect the company to post a 21% and 18% revenue growth in FY13 and FY14, boosting the company’s top-line from IDR8.4trn in FY12 to IDR10.2trn and IDR12.0trn in FY13 and FY14 respectively. PTPP’s solid order book performance is further supported by its long-standing expertise in port development and intimacy with the Indonesian Port Authority (Pelindo).

PTPP has in 10M12 booked IDR15.2trn worth of new contracts, only IDR1.6trn shy from its FY12 target of IDR16.8trn, as the government’s budget is generally back-ended. The company recently won a IDR8.3trn contract for the first stage of development of the Kalibaru Port (a new site 7km west of Jakarta’s Tanjung Priok aptly named as the “New Priok”), an IDR22.8trn (USD2.4bn) high-profile multi-year project to be concluded by end-2017. The second stage of this development, with an investment of IDR15trn, is yet to be tendered. Meanwhile, the Indonesian government is still gearing up to tender out USD1.2bn worth of port projects this year as part of the Public-Private Partnership development scheme.

Bond issuance to improve cost of funds
At present, PTPP is undergoing 3Q12 financial audits for the purpose of a corporate bond issuance in FY13. Pefindo currently rates PTPP at idA-, up a notch from last year’s idBBB+. The company had stated that it would issue up to IDR1trn worth of five-year bonds, with the first IDR300bn taking place in 1Q13 and the rest to follow after Pefindo’s rating review in 2Q12. PTPP had at the end of FY11 and 1H12 held IDR1.34trn and IDR1.24trn worth of bank loans and medium term notes respectively, translating to 1.0x and 0.9x debt-to-equity ratio.

The company plans to maintain interest-bearing debt at similar levels next year, and as such, it aims to reduce its effective bank loans interest rate from the current 12.8%. We expect PTPP to achieve 9%-10% coupon rate based on the latest Indonesian corporate bond spread to government bond, a 200-300bps decrease from the current rate (the company sanguinely guided for an 8% rate). We expect a 9.5% weighted average cost of debts for the company next year.

Strategic expansion
In 2012, PTPP rebranded itself as a company with operations across general constructions, EPC, property, and investments. The company plans to utilize ~IDR400bn of its bond proceeds next year to develop precast, property, and EPC subsidiaries. We think a separate management for these businesses would encourage their independent expansions, despite their currently small contributions to the company’s consolidated revenue. We are also encouraged to learn that PTPP plans to utilize its investment allocations as baits to gain new projects and/or to better control the timing and completion of its projects as an interested stakeholder.

Where we may be wrong
The following risks may affect PTPP’s share price and outlook: i) delays in project implementation due to limitation in the disbursement of the State Budget, and ii) failure to secure new projects as a result of tougher competition.