Company update:
Adhi Karya Persero (ADHI IJ, BUY, TP: IDR3,150)
A Bump In The Path To Glory
Adhi Karya Persero (ADHI IJ, BUY, TP: IDR3,150)
A Bump In The Path To Glory
We
cut our new contracts target to IDR16trn (ex-LRT project) and slash our 2016
earnings estimate, as we expect Adhi Karya’s new contract wins to decelerate. A
delay in the LRT Greater Jakarta would negatively impact earnings in FY16F-17F.
However, as the stock’s downside risk is limited at its current trading levels,
we maintain our BUY call with a lower TP of IDR3,150 (from IDR4,400, 39%
upside). Our TP is premised on16x FY17F P/E, its historical 4-year historical
forward P/E mean.
¨ Delay
in the light rapid transit (LRT) Greater Jakarta project. Given the long delay
in the signing of the LRT Greater Jakarta contract, we expect this to
negatively impact Adhi Karya Persero’s (Adhi Karya) earnings in FY16-17. Adhi
Karya and the Central Government originally planned to sign the contract by the
end of 2015. However, we still see uncertainties in the signing of the contact,
even though it is merely a paperwork issue. Based on the latest update, the
Ministry of Transportation is reviewing the payment scheme for the project. As
the Government may use a bridging loan via other financial institutions to
finance this project, we expect all LRT issues to be solved and the contract
signed by year-end. LRT Greater Jakarta Phase 1 is likely to contribute around
IDR20trn to Adhi Karya’s new contracts target this year and up to IDR5trn of
2017F revenue.
¨ New contracts. In 9M16, Adhi Karya
recorded IDR11trn (+8.9% YoY) in new contracts, ie only 61.1% of our initial
target, below the seasonal 64%.
We cut our new contracts assumption to a
conservative IDR16trn (+15.1% YoY) (ex-LRT Greater Jakarta Phase 1). We
estimate its FY17F new contracts at c.IDR18trn (+12.5% YoY) excluding LRT
Greater Jakarta Phase II which is valued at a potential IDR18trn.
Thus, we cut FY16F recurring earnings by 38%
to IDR385bn (-10.2% YoY) due to delayed payments from LRT Greater Jakarta Phase
1, slower new contracts won YTD and the kitchen-sinking approach of its
engineering, procurement and construction (EPC) unit, which may book aloss of
IDR237bn this year.
¨ A better year in FY17. Adhi Karya may likely
receive the LRT Greater Jakarta Phase 1 payment (IDR5trn) and see an increase
in new contracts next year. We also expect the performance of its EPC unit to
improve. Having said that, we estimate its net profit to surge 82.2% YoY in
FY17, and a wider gross margin of 12.8% which would be supported by higher
contributions from precast, transit-oriented development division and fatter
construction margins.
¨ Key risks. Prolonged delay of the LRT Greater
Jakarta project, slower-than-expected new contract wins and a bigger loss than
expected from EPC.
¨ Maintain
BUY. We
keep our BUY call as Adhi Karya is still the cheaper state-owned contractor in
the market, and with strong growth potential due to its LRT project. The stock
is trading at11.5x FY16F P/E, ie at almost a 30% discount to the sector
average.
Kindly click the following link for the full report: : A Bump In The Path To Glory
Dony Gunawan
Assistant Vice
President
Research Analyst – Construction
PT. RHB Securities
Indonesia
