Wijaya Karya Rising Again on Sector’s Re-rating
We reiterate our strong BUY on WIKA with a new TP at IDR1,850 TP, providing a 20% upside to the current share price. We are basing our TP on a target PE of 16.5x over its FY14 earnings, which is +1 standard deviation above its historical average forward PER. We have upgraded our target mainly on the back of the sector’s re-rating as WIKA’s weekly forward PER has increased from 12.0x to 13.3x within the past two months. Upward adjustment to the sector is warranted, as Indonesia’s construction sector is largely undervalued compared to its regional comps.
Industry-wide re-rating is imminent
Despite construction stocks moving upwards by more than 160.8% ytd, Indonesian companies’ valuations are very modest compared to their growth potential. The sector is currently trading at 15.8x 2013f PER over a 33.3% total market EPS CAGR, which translates to 0.5x PE/G – the lowest among regional peers. The closest comparable to Indonesia, Thailand, is currently trading at 0.7x industry-wide 2013PE/G at an upward of 20.0x 2013PER for each company within the OSK Group Research coverage.
Upward adjustments to WIKA’s target PER-derived TP
In light of the apparent industry’s re-rating, we have chosen to upgrade WIKA’s TP as its earlier target PER has yet to reflect heightened momentum within the construction sector as well as the company’s status as the premier destination to investments in Indonesian construction firms (due to its largest market cap and liquidity).
WIKA’s historical weekly forward PER has increased from 12.0x to 13.3x within the past two months, hence we have adjusted our PER based TP from 14.6x to 16.5x (+1SD from its weekly forward PER) over the company’s FY14 earnings. WIKA is currently trading at 18.4x 2013PER (19.2x at core earnings).
Earnings growth is another catalyst to stock price appreciation
Potential upside on FY13 earnings. WIKA’s share price has historically reacted to earnings delivery with 80.7% correlation. We expect that a decidedly strong earnings growth, on top of the sector re-rating would serve as catalysts for share price appreciation. We have maintained conservative earnings estimates for FY13 at IDR84/share (17% growth y-o-y based on company’s guidance earlier this year) but foresee a potential upside to the current estimate as the company recently hired an ex-director of the State Power Company (PLN) – strengthening its position as the leader within high margin EPC market.
Industry-wide re-rating is imminent
Despite construction stocks moving upwards by more than 160.8% ytd, it is not too late to invest as Indonesian companies’ valuations are modest compared to their growth potential. The sector is currently trading at 15.8x 2013f PER over a 33.3% total market EPS CAGR, which translates to 0.5x PE/G – the lowest among regional peers. Sector re-rating are bound to happen as the sector is moving to the 0.7x-1.0x regional average, considering its most robust earnings growth potential. We think that Malaysia’s construction sector has largely enjoyed its growth during the country’s infrastructure boom in the late 1990s, therefore its solemn PER and EPS increases may be a less direct proxy than Thailand, whose government currently also pushes for an infrastructure upcycle.
At present, Indonesian construction sector is trading at steep discount compared to Thailand, which carries similar industry EPS growth at ~30% in FY13. Due to this reason, we believe that the Indonesian construction sector should appropriately enjoy a re-rating to be at par with Thailand’s 20.0x – 23.0x industry 2013PER. At the minimum 20.0x 2013PER, the industry (i.e. the four companies within our universe in Exhibit 2) would grow its market cap by an average of 26.5% over the next year.
Maintain Strong BUY with new Target Price
We continue to reiterate our strong BUY on WIKA with new TP at IDR1,850 TP, providing a 20% upside to the current share price. We increase the TP largely based on the sector’s re-rating and WIKA’s reputation as the premier destination for construction investments for its largest market cap & solid business model. We are basing our TP on a target PE of 16.5x over its FY14 earnings, which is +1 standard deviation above its historical average forward PER.
WIKA’s weekly forward PER has increased from 12.0x to 13.3x within the past two months on the back of heightened momentum and increased liquidity within the Indonesian construction sector. Through FY12, the market has been building in expectation on the basis of the 2012 Land Clearing Bill, which is implemented in FY14. Therefore, our new TP implies a 22.0x & 16.4x 2013E&2014E PER as we maintain conservative earnings estimates for FY13 at IDR84/share (17% growth y-o-y based on company’s guidance earlier this year). We have priced in the Bill within the company’s FY14 earnings as it would provide a large boost on the ease of project completion and market appetite toward the sector.
Note that these new valuation still arrive way below WIKA’s closest regional competitor (in term of market cap and earnings growth), which trade up to 25.0x 2013 PER. WIKA’s share price has historically reacted to earnings delivery. Over the past four years, the share price has had an 80.7% correlation to its earnings growth. We expect that sector re-rating, on top of a decidedly strong earnings growth would serve as catalysts for share price appreciation.
