Total Bangun Persada, Extraordinary Margins

Positive industry outlook
The company bagged IDR1.48trn worth of new contracts during the 9M11 period. This will boost its total outstanding jobs to IDR4.3trn, of which IDR2.8trn will be carried forward to 2012. Meanwhile, Bank Indonesia held the policy benchmark rate at a lowest historic level of 6%, following a cumulative 75-bpt cut since the beginning of 4Q11.This should have a positive impact on the construction industry as it will spur demand for houses, apartments and other buildings.

In addition, in Budget 2012, the Indonesian government proposed to increase its capital spending by 19% to IDR168trn from IDR141trn, mainly for infrastructure spending. The construction sector also should be the direct beneficiaries of the new Land Bill law, which could be felt from 2012.

Actively building power plants and property
Total is renowned for constructing high-quality high-rise commercial and industrial buildings. The company has just entered the utilities segment by becoming the main contractor for the Keban Agung Lahat and Ulu Belu power plants, both located in the southern Sumatera area. This should pave the way for Total’s participation in the tenders for several power plant projects. The number of such projects is expected to continue to snowball since Indonesia’s electrification ratio of 66% is still among the lowest in Asia.

The country’s demand for electricity is expected to grow by 9% p.a. from now up to 2018
Separately, the property projects under its subsidiary Total Persada Development comprising villas in Bali (30% of total units sold during the pre-sales stage) and office buildings in Jakarta, are expected to start contributing recurring income in 2H13. The net margin from these projects is expected to be 10%-15%, much higher than the construction segment’s average of 4%-6%.

Earnings growth still robust
The company booked a net profit of IDR82.8bn (+55% y-o-y) in 9M11 due mainly to high profitability. Total has a policy of allowing some of its clients to deal directly with sub-contractors (direct contract). This helps improve margins as it retains the same fee as its scope of work as the main contractor is the same while at the same time lowers its cost (by eliminating the double final taxation related to double revenue booking). Although revenue only grew 3% y-o-y to IDR1.1trn, gross margin expanded 340bps to 15.6%, which further led to its gross profit surging 32% y-o-y to IDR172bn in 9M11, or 76% of our FY11 forecast.

Maintain Buy call with TP of IDR390
The stock is trading at a 2012 PER of 5.8x, below its average peer valuation of 7.2x. The company has a strong 2011-13f CAGR earnings growth of 19%, spurred by its growing orderbook and the fact that it enjoys superior margins relative to its peers. The company’s clean balance sheet and cash pile gives it a strong advantage over its financially weaker competitors when it comes to bagging yet more construction projects.