RHB Indonesia Morning Cuppa - 6 September 2016- (Acset Indonusa)

Good morning,

Acset Indonusa: Going North

We continue to like Acset based on:

1. Its earnings visibility – the best amongst private contractors;

2. Healthier balance sheet post rights issue to help capture its resilient growth;

3. Robust growth.

We roll over our valuation to FY17 and maintain BUY with a new IDR3,900 TP (from IDR4,550, 25% upside) based on 18x FY17F P/E. We expect Acset to continue its decent performance in 3Q16 and book stronger new contracts in 4Q16.

¨ Healthier balance sheet. We expect Acset Indonusa (Acset) to be in net cash positions in FY16-17 (from 0.18x and 0.23x respectively) post its 1H16 IDR600bn rights issuance exercise. This stronger balance sheet, in our view, will allow the firm to capture higher project values, especially for infrastructure works that require stronger working capital.

¨ Robust growth. We expect Acset’s FY16-17 earnings to grow 130.2%/53.7% YoY respectively, spurred by a recovery from last year’s cost overruns, lower interest rates and strong orderbook. We expect opex/revenue to drop to 6% in FY16-17 (FY15: 6.9%) on recovery from last year’s cost overruns as well as the company starting to collect payments from its projects. The lower central bank and new government benchmark rates will also benefit Acset in two ways:

i. The lower interest rate that will translate into cheaper interest expenses;

ii. A better property and realty sector outlook that will generate a higher supply of projects.

¨ Orderbook. Acset’s new projects have reached the IDR2.4trn mark and it is expecting to collect IDR3.5trn by end-2016. Thus, based on management’s feedback, there is a potential upgrade in its new contracts target after 3Q16. We estimate that this will reach IDR4trn by the end of next year, backed by stronger property and realty market, and projects from the Astra Group (Astra).

¨ One of the latter’s biggest projects is the 2x1,000 megawatt (MW) Tanjung Jati coal-fired power plant. Astra is still working on the financial closure of this development and expects to complete this stage by end-2016. Its engineering, procurement and construction (EPC) section can be worth up to IDR10trn, and Acset will potentially get the spillover from this as a subcontractor.

¨ 3Q16 outlook. We expect new contracts to be accelerated in 4Q16 instead of 3Q16. Acset will likely continue posting a solid performance, as opex will likely decrease while interest expenses will be lower after the rights issuance.

¨ Maintain BUY, with a new IDR3,900 TP. We maintain our BUY call and change our TP to IDR3,900. This is as we roll over our valuation to FY17 and fine-tune our estimates. Our TP is based on an unchanged 18x FY17F P/E. Risks to our call include prolonged cost overruns, soft demand in the property sector and lower-than-expected new projects from Astra. (Dony Gunawan)

Link to report: Acset Indonusa Tbk : Going North

Link to Daily report: Indonesia Morning Cuppa - 060916