RHB Indonesia Morning Cuppa - 30 December 2016 - (Construction) Unknown Jumat, 30 Desember 2016




Good morning,

Construction: Stronger Outlook In 2017

¨ Stronger outlook in F17F. The Government has allocated IDR387trn (+23.0% YoY) for infrastructure spending in state budget FY17. The Ministry of Public Works and Public Housing will receive IDR98.8trn from the FY17 state budget, while the Ministry of Transportation will obtain IDR42.1trn, higher than this year’s budget.
The transfer to local Governments for infrastructure spending will be increased to IDR183.7trn, more than double last year’s amount. We believe this underscores the Government’s intention to accelerate equal infrastructure development across the country.

As such, we believe it would trigger higher orderbooks for contractors, especially state-owned enterprises (SOEs) – we estimate that SOEs’ total orderbook surged 24.1% YoY. As a result, we are projecting higher earnings growth of 50.1% (vs 27.2% in FY16F) in the construction sector next year. We maintain our Overweight call on the Indonesian construction sector as its outlook remains positive.
¨ Early tender process. The Ministry of Public Works and Public Housing will accelerate spending through an early tender process. The ministry is set to tender IDR39.15trn worth of infrastructure projects for FY17F until the end of this year, with a total of 6,295 projects, more than double last year’s early project tenders. Thus, we should see spending from the Ministry of Public Works and Public Housing to start to accelerate from 1H17.
¨ Big projects to be expedited. We believe top priority projects would remain the Government’s key focus. The consortium of high speed railway (HSR) project, Kereta Api Cepat Indonesia China, would start construction of the project early next year, as the consortium has already handed over the IDR15.8trn civil work contract to Wijaya Karya (WIKA IJ, BUY, TP: IDR3,150).
On the other hand, LRT Greater Jakarta, constructed by Adhi Karya (ADHI IJ, NEUTRAL, TP: IDR2,085) is currently under construction and progressing well, with more than 10% progress made even though the contract has yet to be signed. By the end of 2016, the contractor aims to complete 15% of civil work development.
¨ Progress on 35,000MW mega project. Up until the first week of October, the Government estimated that there were 8,716MW power plants in the construction phase, with 7,010MW power plants left to be tendered. The Government is therefore aiming to complete this mega project in 2020, later than the initial plan of 2019. Nevertheless, the one-year delay is within our expectations, and we believe this is much better than the era prior to President Joko Widodo taking office in Oct 2014. Given the smoother land clearing process now plus other supporting government policies, we see much faster execution of projects from here on.
¨ Lowered land acquisition risk. We remain positive on the construction sector’s outlook given the faster land acquisition process now – the biggest obstacle in infrastructure development in Indonesia. For example, we visited a 2x1,000MW coal-fired power plant located in Batang, the first public-private partnership (PPP) project in Indonesia. The project started in 2011 but was delayed until early 2016 due to a hurdle in the land acquisition process. As a result of strong government assistance, the entire land area needed was cleared and the consortium (BPI) has begun civil works.
¨ Impressive YTD progress. The Government has spent 51.7% of its FY16 capital spending budget as of 11M16, higher thanthe46.9% spent as at the same period last year. This is in line with our expectations of a total IDR195trn to be spent by the end of2016. Furthermore, state owned contractors have collected IDR123.6trn in new contracts as of 11M16, 73.7%higher vs the same period last year. We expect total new contracts growth of around 60% this year.
¨ Key risks include lower-than-expected government revenue, which would lead to infrastructure budget cuts and in turn slow infrastructure development in Indonesia. Moreover, although land acquisition has been progressing well, it is still one of the biggest hurdlesfor Indonesia’s infrastructure development especially for projects which require large land areas such as toll road projects.
¨ Maintain Overweight. We maintain our overweight stance on the Indonesian construction sector with Top Picks Waskita Karya (WSKT IJ, BUY, TP: IDR3,675) and Pembangunan Perumahan (PTPP IJ, BUY, TP: IDR5,400). Waskita Karya has the highest earnings visibility among state owned contractors, while we are projecting strong earnings growth next year at Pembangunan Perumahan, post rights issue and on a healthier balance sheet. (Dony Gunawan)

Link to Daily report: Indonesia Morning Cuppa - 301216

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Best regards,

Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia

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