Wijaya Karya Unlocking Value

WIKA booked a 55.7% net profit growth y-o-y in 1HFY13 to arrive at 50.5%/46.4% of the Company’s/our FY13 estimate respectively – in line. It is on track to unlock the value of subsidiary PT Wijaya Karya Beton (WIKA Beton) through an IPO that is slated to conclude in 2HFY13. We call for a BUY on WIKA with a IDR3,000 TP, as we roll over to FY14F. It is trading at 20.7x and 16.0x FY13F P/E and FY14F P/E respectively.

1HFY13 results in line with estimates.
Revenue was booked at IDR5.3trn (+31.3% y-o-y) over IDR280.3bn net profit (+55.7% y-o-y). Its 1HFY13 earnings are at 50.5% of the Company’s FY13F target and 46.4% of ours. Recall that WIKA has booked 39% of its FY targets in 1H for the past two years. However, we deem that our forecast at 8.8% above the Company’s FY13F guidance has captured the potential performance.

Solid profitability margin performance.
WIKA managed to book 5.3% net margin levels, down from 5.9% in 1QFY13. However, this remains the highest among all other state-owned construction companies, which generally post 3%-4% net margins. The drop in net margin q-o-q is caused by a higher proportion of lower-margin construction work (37.6% in 1HFY13 from 30.9% in 1QFY13) compared to engineering, procurement and construction (EPC) works (24.1% from 30.3% in 1QFY13) – a normal fluctuation in the course of a fiscal year. We expect WIKA to book 5.0% gross margin at end FY13F.

Unlocking WIKA Beton’s value via IPO.
The Company is currently undertaking a share buyback from the precast concrete market leader’s employees to achieve 90%-100% pre-IPO ownership. It plans to issue up to 40% new shares to the public in an offering slated for 2HFY13. Proceeds from the IPO have been earmarked to expand its manufacturing capacity to 2.2m tonnes by FY14F, as part of efforts to maintain its ~60% share in the domestic precast manufacturing market.

Upgrade to BUY with IDR3,000 TP, as we roll over to FY14F.
In light of a robust earnings performance amid recent price weakness, we call for a BUY on WIKA for IDR3,000 TP – representing a SOP fair valuation of DCF-based WIKA Beton at IDR1,400 per share and the rest of WIKA’s businesses at IDR1,600 per share (19.0x target FY14F P/E).