Wijaya Karya No Earnings Surprise In Sight

We raise our FY13 earnings estimate for Wijaya Karya (WIKA) by 7.8% in light of robust contributions from its higher-margin Mechanical & Electrical (M&E) and Industrial Concrete segments. Even so, we downgrade our call to a NEUTRAL given limited room for an earnings surprise on top of our revised estimate and WIKA’s historic high valuation. The stock is trading at 21.8x and 17.3x of 2013E and 2014E P/Es respectively, which is a 28% premium to the industry average.

FY13F earnings revised up as high-margin segments propel growth
We raise our net profit estimate for Wijaya Karya (WIKA) by 7.8% from IDR564bn to IDR604bn on the back of its robust performance in 1Q13, This is 8.8% above its official guidance but on par with the Management’s internal target. We expect WIKA Beton’s contribution to the consolidated revenue increasing from 18.6% to 22.0% by FY14. We also cut the expected contribution from the Civil Construction segment to 35.2% for FY13 from 40.2% previously. We anticipate the company to see its net margin increasing from 4.7% in our earlier estimate to 4.9% by year-end on the back of a better portfolio mix.

Mega-projects in the pipeline, but no earnings surprise in sight
WIKA is reportedly in the final stage of securing the IDR1.3trn Belawan Port and IDR15trn Jakarta’s MRT mega-projects. The multi-year nature of these mega-projects offers little potential for earnings surprise in the near future. Force majeure aside, our expectation for a 24.7% and 32.7% y-o-y growth in revenue and net profit this year has fully accounted for the company’s capacity for expansion until year-end.

TP raised to IDR2,500, downgrade to NEUTRAL
Within two days of our last Buy call on the back of its robust 1Q13 results, WIKA’s share price rose to hit its historical peak at 20.4x of its weekly forward P/E. We deemed it is not yet time to roll over our valuation to the following year due to: i) the yet unforeseeable executional risks as Indonesia will go through political and judicial changes in 2014, and ii) the fact that the company’s valuation has captured its full year performance amid minimal prospects for an earnings surprise from our revised estimates. Downgrade to NEUTRAL.

Robust 1Q13 and better portfolio mix warrants an earnings upgrade.

1Q13 results beat our/street estimates
WIKA reported a 65% surge y-o-y in its 1Q13 net profit to IDR157bn, making up 28% of its and our earlier FY13 estimates. This also accounts for 21%-24% of its FY13 net profit target, which signals a positive year ahead. In end-March, it booked IDR4.68trn in new contracts or 23% of its FY13 target – a significant progress considering that 60%-70% of the Government’s infrastructure budget is commonly disbursed in 2H. We have upgraded our FY13 revenue and net profit estimates for WIKA by 4.2% and 7.8% respectively – 3.2%/8.8% above the company’s estimate and 2.6%/3.6% above street estimates.

M&E and Industrial Concrete segments dominated topline and expanded margins
WIKA’s 1Q13 margin expansion was largely caused by a better portfolio mix from carry-over projects such as the USD183m EPC contract from Chevron (announced in 2H12). The contribution from its M&E segment improved from 28.4% in 1Q12 to 30.3% in 1Q13. After cost overruns last year, the segment’s gross margin improved from 2.1% to 10.3% this year. With WIKA divesting its majority stake in the ailing Jabar Power in 1Q13, we expect the segment’s gross margin improving to 12%-13% by year-end.

Another high-margin segment, Industrial Concrete, also helped to expand margins. WIKA Beton contributed 29.4% to WIKA’s topline, with 12.6% gross margin in 1Q13 vs 12.1% last year. Civil Construction segment’s gross margin dropped from 6.7% in 1Q12 to 5.6% in 1Q13, but the decline was compensated by smaller proportion of the segment’s contribution to the consolidated topline (from 36.4% in 1Q12 to 30.8% in 1Q13).

Upside revision to earnings as high-margin segments propel growth
On the back of a robust 1Q13 results, we increase our net profit estimate for WIKA by 7.8% from IDR564bn to IDR604bn – 8.8% above the company’s official guidance but on par with its management’s internal target. As WIKA Beton prepares for an IDR1trn proceed from its IPO in 2H13, we expect the company’s contribution to increase from 18.6% to 22.0% by FY14, supporting a robust 24.7% and 23.3% consolidated y-o-y revenue growth in FY13&FY14 as we expect WIKA to retain the majority ownership at Beton.

We adjusted downward the expected contribution from Civil Construction segment to 35.2% in FY13, down from 40.2% in our previous estimate. Accordingly, we estimate that the company will see its net margin imrove from 4.7% to 4.9% by year-end.

No additional earnings surprise despite a robust project pipeline

Mega-projects in the pipeline but no earnings surprise in sight
WIKA is reportedly in the final stage of securing the IDR1.3trn Belawan Port project, which is expected to commence development in 2H13. It is also the frontrunner to the Jakarta’s MRT project, along with its Japanese consortium partners Obayashi Corporation and Shimizu Corporation. The winner of this IDR15trn mega-project is expected to be announced later this week.

The project consists of six segments, which would be delivered in stages from 2H13 to 2017. We note that the multi-year natures of these mega-projects offer little potential for an earnings surprise in the near future. Force majeure aside, our expectation for 24.7% and 32.7% y-o-y revenue and net profit growth this year has fully been accounted for in the company’s capacity for expansion until year-end.

A higher TP at IDR2,500 but a downgrade to NEUTRAL

SOTP-based TP increased to IDR2,500/share
Based on our initial assumptions of a 7.5% risk-free rate, 5% equity risk premium, 1.1 beta, 5.1% cost of debt (net of taxes) and 50% debt-to asset ratio, we value WIKA Beton with the DCF method at IDR1,200/share – the upside of which was mainly derived from our robust 25%-32% net profit growth assumption for the subsidiary over the next three years, in light of its planned IPO. We value the rest of the company’s businesses (construction, EPC, and realty) at IDR1,300/share, basing our fair value off of a 19.0x target P/E over the business segments’ revised FY13 earnings estimate.

Valuation is at historical peak, downgrade to NEUTRAL
WIKA is currently trading at 21.8x 2013E P/E based on our revised estimates, which is a 28% premium to the industry average and justifiably so due to its compelling business model. Just two days ago in our results preview, we stated that WIKA deserved another strong BUY on the back of its robust 1Q13 performance and our subsequent expected earnings adjustment. In the past two days, its share price rose by another 11%, putting the company’s one-year forward P/E at 20.4x – the highest level since its IPO in late 2007.

WIKA is “merely” trading at 17.3x 2014E P/E, but we have consciously refrained from rolling over our call to the following year (such is the industry norm nowadays during a bullish market especially as we continue to be wary over the macroeconomic headwinds ahead (i.e. inflationary pressure due to the planned fuel price hike, weak Rupiah, etc). 2014 will also be a testing period for Indonesia’s infrastructure boom, as it will the first year that the new Land Acquisition Bill goes into effect and it will be the first time that the country experiences changes in political leadership for the past decade.

In short, we have knowingly refrained from ostentatious efforts to predict the faraway future and that WIKA’s current valuation, at its historical peak, has fully captured the company’s robust potential for growth in FY13. Furthermore, there is no foreseeable earnings surprise from our revised estimates. Downgrade to NEUTRAL.