Wijaya Karya Strong Sign Of Robust Prospects

WIKA’s 1Q13 net profit surged 65% y-o-y to IDR157bn, representing 28% of the company’s and our FY13 estimates – a strong sign for a robust year ahead as the company has historically booked a mere 18%-22% net profit in 1Q. WIKA remains our top pick for the construction sector. Maintain strong BUY at IDR2,200 TP.

Solid 1Q13 results; potential upside to FY13 target
At its annual shareholders general meeting yesterday, WIKA reported a 65% surge in 1Q13 net profit to IDR157bn, making up 28% of the company’s and our FY13 estimates. WIKA generally booked 18%-22% of its FY net profit in 1Q, making the latest event a positive sign for a robust year ahead. In end-March, it has already booked IDR4.68trn worth of 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.

Best corporate strategy in the industry
WIKA is the only Indonesian construction firm with the ability to capture the country’s robust independent power producer (IPP) pipeline (with estimated investment of around USD45bn for 2012-2021). The company’s divestment of its non-performing assets and ailing geothermal power plant WIKA Jabar Power should help improve gross margin for its mechanical and electrical (M&E) segment through a better portfolio mix from its IPP investments (with a mandated 18%-22% IRR) as well as the engineering, procurement and construction (EPC) contracts (300bps higher than civil construction’s gross margin of 8%-10%).

Its subsidiary WIKA Beton, the largest pre-cast and concrete producer with a 60% market share, provides it with stable supply of raw materials, thus giving the company a clear competitive advantage. WIKA offers the strongest balance sheet among all state-owned (SOE) construction firms with a stable net cash position since it 2007 IPO – a prerequisite that enables it to take on SOE-dominated infrastructure projects with the least financial strains.

Maintain strong BUY
We maintain a strong BUY on WIKA at IDR2,200 TP, with potential upside to our call. The stock is trading at 23x 2013 P/E, a premium to the industry’s average but deservedly so due to its well-rounded business model.