Company
update:
Hexindo
Adiperkasa (HEXA IJ, BUY, TP: IDR3,300),
Coal Price Recovery & Infrastructure Sales Lift Outlook
Coal Price Recovery & Infrastructure Sales Lift Outlook
Hexindo’s share price still does not reflect
its expected earnings recovery ahead (FY16-19F (Mar) CAGR of 36%) due to:
1. Its heavy equipment unit’s gross
margin turning positive again;
2. Growth in heavy equipment sales to the
infrastructure sector;
3. A sizeable increase in revenue from
its spareparts and service & maintenance segment,as the overhaul cycle
willbeginin FY17 – which is also triggered by recovery in coal prices.
We
tweak our assumptions and upgrade to BUY with a TP of IDR3,300 (from IDR1,200,
27% upside).
¨
Earnings
to recover at a FY16F-19F CAGR of 36%.Hexindo Adiperkasa’s (Hexindo) accounting
year ends in March. Its earnings peaked at USD72m in FY12 and declined
thereafter, mainly from thedecrease in business volume stemming from
thecontinuous downtrend in coal pricesuntil January. Around 60% of
itsconsolidated revenue(FY16) iscoal-related. As coal prices are recovering and
have increasedby 39%YTD, we think in FY16 it was the bottom of Hexindo’s
earnings and it should see asizeable earnings recovery ahead.
¨
Heavy
equipment unit rebounds and books positive gross margin again.Hexindo’s gross
margin from heavy equipment salesstarted to decline when its inventory
outstanding days exceeded 120 days in FY14. It hit a bottom in FY16when the
companybooked a gross margin of -2.8% from selling heavy equipment. We expect
its gross margin from heavy equipment sales to recover from FY17 onwards, as
Hexindo has no more long outstanding inventory ofheavy equipment and its
inventory is now precisely reflected in its balance sheet (Figure 1).
¨
Infrastructure
spending to boost demand forheavy equipment.The Joko Widodo (Jokowi)-led
Government is focusing on building infrastructure across Indonesia, which
willboost heavy equipment sales to the infrastructure sector.
¨
Overhaul cycle of
mining heavy equipment should start inFY17.In FY12, Hexindo booked significant
heavy equipment sales of USD477m, of which 930 of a total 3,084 units were sold
to the mining sector. Heavy equipment needs to undergo an overhaul after 15,000
working hours.We think the mining heavy equipment should enter an overhaul
cycle in FY17, which will boost revenue from service & maintenance and
spareparts sales.
¨
Upgrade
to BUY with a IDR3,300 TP.We fine-tune our assumptions and increase our
FY17forecast by 34%. Upgrade to BUY from Neutral, with a DCF-derived TP of
IDR3,300 (WACC: 14.1%, long-term growth: 2.0%) asits share price still does not
reflect a sizeable recovery in Hexindo’s earnings ahead.
¨
Our TP
implies a FY18F P/E of 12.9x (-0.4 SD from its 5-year mean P/E).
¨
Key
risks to our call include weaker-than-expected demand for coal and a significant
decrease in coal prices.
Kindly click the following link for the full report: Hexindo Adiperkasa : Coal Price Recovery & Infrastructure Sales Lift Outlook
Best regards,
Hariyanto Wijaya,
CFA, CFP, CA, CPA
Vice President
Research Analyst – Heavy
Equipment, Plantation
PT. RHB Securities
Indonesia
