Wijaya Karya Company Update

We re-instate coverage on Wijaya Karya (WIKA) with a strong BUY and IDR1,600 TP, reflecting a potential 16% upside from its current price. As we roll over our valuation to FY13, we base this TP on a 14.6x target PER over its FY14 EPS. The company’s long-standing relationship with state oil & gas company Pertamina and the nation’s power company PLN spells solid growth in its EPC business, which is expected to see margin expansion. With its diversified operations, strong balance sheet and clear strategic direction, enhanced by its status as the most liquid construction company, WIKA deserves a premium over its competitors.

24% earnings CAGR for FY13-14
WIKA’s orderbook has been increasing by 22.3% CAGR over the past six years. Based on the IDR15.6trn worth of contracts carried over from last year as well as new contracts targeted for FY12, WIKA’s orderbook should double, thus boosting its revenue to IDR9.51trn this year. We forecast revenue to continue to climb to IDR11.07trn and IDR14.71trn for FY13f and FY14f, in tandem with the growth trend from FY11-12 (25.6% CAGR), spurred by the government’s push for infrastructure developments.

Margins to widen as EPC projects increase
WIKA currently commands a 74% share in Indonesia’s engineering, procurement and construction (EPC) market, which is dominated by three state-owned EPC players. Gross margin from the EPC business is ~12%, 200-300bps higher than civil & building construction. Between FY10 and FY12, WIKA’s EPC revenue grew from a mere 1% at end-FY10 to 31% of total consolidated revenue in FY12. With that, coupled with the group’s familiarity with Pertamina & PLN as the main EPC project owners in Indonesia, we expect WIKA’s bottomline margins to expand by a 24.3% CAGR between FY12 and FY14.

Strong balance sheet & cash flow from government projects
More than 70% of WIKA’s projects are owned by the Indonesian government or other state-owned enterprises (SOEs). As the company has consistently posted net cash, we expect it to maintain a net cash position. Government projects, unlike private projects, guarantee a stable cash flow as they are paid for on a monthly basis, which helps to smoothen any fluctuation in cash flow and reduce the incidence of bad debts.

Industry-wide Re-rating is eminent
We are re-initiating coverage on WIKA with a strong BUY and IDR1,600 TP, providing a 16% upside to the current share price. As we roll over our valuations to FY13, we are basing our TP on a target PE of 14.6x over its FY14 earnings, which is +1 standard deviation above its historical average forward PER. We continue to believe that the company would trade at the upper range of its precedent valuation as its strong order book and the government’s push for infrastructure projects would continue to propel its earnings upside.

We prefer WIKA compared to other Indonesian construction companies for its diversified operation, higher EPS growth, strong balance sheet, and clear management strategic direction. Its long-standing relationship with Pertamina (state oil & gas company) and PLN (state power company) will spur steady growth in its EPC business, which should see widening margins going forward. As it is the most liquid construction stock with the largest market capitalization in Indonesia, we find WIKA’s valuation premium over its competitors is justified.

Share Price Driver
WIKA’s orderbook has been increasing by a 22.3% CAGR over the past six years. We expect the company to chalk up revenue of IDR11.07trn and IDR14.71trn for 2013f and 2014f (24% CAGR). WIKA has achieved IDR6.37trn worth of revenue in 9M12, up 17.0% y-o-y, representing 66.9% of our target FY12 revenue. We expect the momentum to pick up in 4Q12 as the government’s spending budget generally remains back-ended in the last quarter of a year. We foresee the quarter contributing ~33% of its FY12 net revenue. Historically, 4Q accounts for 30%-35% of the company’s FY revenue and 30%-45% of FY net profits.