FE th UII

The 12

Construction

ICMSS Investment Analysis Ticker : WIKA.IJ Price : 1,480

Wijaya Karya, Tbk.

Recommendation : BUY Price Target : 1,760

December 17, 2012

Highlight
WIKA was Chosen as The Best Company by Forbes: WIKA is the only State Owned Enterprise in the list of 50 best companies announced by Forbes Magazine. WIKA ranked on number 24 and it is the best company in its sector. This is a good achievement for the company since the valuation from Forbes is from the overall performance. WIKA already reached 74.5% from contract target in 2012: WIKA has reached Rp.12.03 billion in November which is 74.5% of its contract target. It needs Rp.4.47 Billion more to reach the target but WIKA show its optimistic. In October 2012 WIKA got nine contracts worth Rp696,03 Billion which is from Oksibil Deka road construction Rp206,68 B, Betano project in Timor Leste Rp93,81 Billion, precast concrete pipe rack project worth Rp81,72 Billion, and the construction of Nursing Faculty of Universitas Indonesia Rp36,53 Billion. The other five is contract for its subsidiaries which is WIKA Beton contract Rp121,41 Billion, WIKA Realty Rp138,99 Billion, WIKA Intrade Rp11,79 Billion, WIKA Gedung Rp3,94 Billion, and WIKA Insan Pertiwi Rp1,16 Billion. WIKAs revenue in 3Q12 higher than its peers: WIKA booked Rp 6,370 Billion of 3Q12 revenue which is higher than its competitors. ADHI booked Rp 3,565 Billion, PTPP generate Rp 3,942 Billion, and TOTL gain Rp 1,369 Billion. CAGR of WIKA in 2007-2011 is 25.7% which make us optimistic that the company focuses on pursuing growth in the right sector.

Important disclosures appear at the back of this paper

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December 17, 2012

Investment Summary
Despite the unfavorable economic condition such as the Euro crisis and the slowdown of China manufacture, Indonesia has a strong economic condition that makes this country is favorable to be an investment destination for many investors. This condition brings a positive influence to construction business in Indonesia. The construction sector in this country contributes 43,907 Billion Rupiah to GDP in 3Q12, remain higher than 3Q11 42,230 Billion Rupiah. In the FY11 the GDP decrease due to the bad economic condition but we expect that FY12F will be higher. Figure 1: Construction to GDP

Source: Bank Indonesia

Acceleration growth, excellent company condition, support from government WIKA, as one of the Indonesias construction company, shows an increasing growth, as reflected by companys CAGR FY07-FY11 25.7% and the growth of revenue in FY11 is 25.8%. The company also has fulfilled 74.5% of its target order book in FY12F. The companys good performance is also supported by government policy with its MP3EI (Master Plan for Acceleration and Expansion of Indonesia) Program that will increase the companys book order in 2011-2014. Figure 2: Price earning in 52 weeks

Source: FE UII Research

WIKA also show its stock performance compare to ADHI, PTPP, and TOTL. The stock performance remains increase in 2011. Compare to composite index (IHSG), WIKA still has better performance compared with its sector and world construction index also better. Figure 3: Index Comparison

Source: Financial Times

WIKA has more expensive in a stock price according to Price Earning Ratio compared to its competitor. Also for Price to Book Value, WIKA are higher than others, it means that WIKA also put at the most expensive price among these three peers include ADHI, PTPP, and TOTL. But then ,

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WIKA has leading on its BETA. It means that WIKA has less risk compared some other top peers in the construction sector. Figure 4: Ratio Comparison

Source: Reuters

Because of the bright future of construction industry in Indonesia, and good companys performance along this year, we recommend to BUY WIKAs stock. And based on our DCF analysis, we arrive at the price Rp. 1,760 which is higher than current price Rp. 1,480 means that WIKA stock currently undervalued. These targets give us 18.91% potential upside. Increase in EPS and BVS estimated at 2012F to be 77.90 and 387.30 will represent how well WIKA manage its business at this year so that it will influence the stock movement to rise up. In advance, WIKA sales estimated at the end of the year are easily to achieve following the third quarter report already fulfills more than 75% of its target. We predict WIKA stock movement in the rest 2012 is around Rp 1,360-Rp 1,650 according to technical overview, it still cannot reach the fair value of the stock but in the beginning 2013 there will be probability that WIKA will move around Rp 1,760 as targeted before. We recommend buy on weakness based on both technical overview and the increase of revenue, net income, and the good future of Indonesian infrastructure. Construction sector shows that it has more aggressive compare to IHSG by its beta which shown at 1.03, it means that investing in construction are give 3% more profit than IHSG either of its risk.WIKA has lower risk according to latest one year price changes compare to its peers by standard deviation analysis.

Valuation
We assume that the growth of revenue is constant 19.47% resulting Rp. 9,248,984 Million in FY12F and net income reach Rp. 474,007 Million. We give recommendation BUY as the price target Rp 1,760 by Discounted Cash Flow with assumption of WACC13.5% (Cost of Debt 16%, Cost of Equity14.5%, beta 1.24, risk-free 6.6%, risk market 13%) and by projecting free cash flow for the next five years. It gives the potential upside 18.91%. This Target price reflect PER of FY12F 22.66x, and the EV/EBITDA 2012F 10.8x Figure 1: DCF Analysis

The 12th ICMSS Investment Analysis

December 17, 2012

Source: FE UII Research

Risks to the Price Target Some factors that may risk our valuation are 1.) The macro economic condition that may influence the growth of company, 2.) The delay of payment for the project that may increase cost, 3.) Project default of payment, 4.) Raw material prices fluctuation due to the fluctutation of exchange rate which may reduce the profit. The potential upside to our valuation could be lower than we expected.

Business Description
WIKA claimed itself as the Indonesias leading integrated EPC and Investment Company. WIKA was founded in March 11, 1960, with initial business in electrical and water pipe installation works. Companys areas of operation are in Indonesia and North Africa. The companys major customers are State Owned Enterprises (SOE) with the contribution of 42.5% of the overall contract acquired in 2011, the government of Indonesia contributed 29%, and 28.5% is contributed from private sector. Figure 1: WIKAs Subsidiary and Line of Business

Source: Company Data

Companys areas of operation are in Indonesia and North Africa. The companys major customers are State Owned Enterprises (SOE) with the contribution of 42.5% of the overall contract acquired in 2011, the government of Indonesia contributed 29%, and 28.5% is contributed from private sector. The construction SBU is still become the main source of income for WIKA, as in 2012 that this SBU contributes 56% to its total revenue. WIKAs investment in energy through the establishment of power plant in recent years has give positive impact to companys performance, and these power plants have reached total capacity for 200 MW.

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December 17, 2012

Figure 2: Revenue Segment

Source: FE UII Research

Recently, WIKA is also investing in renewable energy project through WIKA Jabar Power by establishing geothermal plant, if it is succeed may give a significant impact to companys future performance. Figure 3: WIKAs Order Book

Source: Company Data, FE UII Research

WIKAs favorable performance is contributed by its strategy in running the business. WIKA is very selective in choosing its customers, the company is centralize its procurement activity and doing efficiency in its operation, and the company is implementing a financial centralization in its financial strategy.

Industry Overview and Competitive Positioning

Listing Competitor As the most highly reputable company at construction sector differentiate by its ownership; WIKA, ADHI, and PTPP are state-owned enterprises, while TOTL is a private enterprise. WIKA leads the competition by having the highest revenue in its sector. This gives us confidence about the better exposure to infrastructure spending that WIKA will give than its peers. Property Sector Ready to Raise The growth of construction industry in Indonesia (Q to Q) in 2Q12 is 4,4%, and year to year growth is 7,3%. The future of construction industry in Indonesia is still bright, as the impact of better economic performance of Indonesia, that attracts many investors to invest their money in this country, that have a positive impact in enhancing the demand for construction project increase. The government regulation and programs in construction also supports the growth of construction industry, such as The Presidential Decree on Land Acquisition (PP No. 71 Tahun 2012) and MP3EI (Master Plan for Acceleration and Expansion of Indonesia) Program that enhance the additional construction projects, and WIKA as one of the Indonesias SOE in construction business will be benefited by these two factors.

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Figure 1: Revenue

Source: FE UII Research

Comparing the revenue between four companies at third quarter of 2012, WIKA is leading the way among the others with more than Rp 6000 Billion sales. It gives us confidence that for the end of 2012, WIKA also can leave the other competitor behind. Competitive Positioning of WIKA using Porter Five Forces Analysis WIKA, as an integrated EPC and investment company is one of the main player of infrastructure industry in Indonesia. Because of its name and reputation, there are many projects that done by WIKA, especially those that are coming from Indonesian government. Bargaining Power of Suppliers WIKA is having a backward-forward integration strategy that its backward strategy enables WIKA to ensure the supply for its product. Threat of New Entrants The entry barriers in the construction industry is high, so it is difficult for a new competitors to enter the construction market.. Bargaining Power of Customers Most of WIKAs project coming from government officials, so the contract and the payment of the contract from the government project is more secure than those that coming from the private customers. Threat of Substitutes Products There is a limited number of substitute product for construction, means that the customer cannot easily find the substitute for fulfilling their needs in construction.

Competitive Rivalry Within an Industry The competition within construction industry is quite intensive, the exit barrier for this industry is low, so the small companies if they failed to compete will be out of the market. WIKA itself is one of the biggest player within the construction industry, even WIKA is regarded as the largest contractor within this industry. The other two SOEs that runs in infrastructure industry, ADHI and PTPP, are having the same line of business like WIKA, that not only runs in construction, but also expand their operation into EPC and investment.

Indonesias GDP that is in level of 6.29% in Q312 with maintained inflation level (4.32% in November, 2012; still in favorable level), these two macroeconomic indicators supports the growth of Indonesias business, especially WIKA, and BI rate in level of 5.75% that becomes the reference of interest rate also helps the growth of WIKAs business (although WIKA is in its best effort to reduce the debt that it raised in financing its project). Even though the Rupiah exchange rate with US Dollar (mid rate USD-IDR) is not favorable (9.645,00 per Dec 17, 2012), and it is does have a significant impact to WIKAs performance, due to many imported raw materials and project that using two currencies, IDR and US Dollar, that may risks WIKAs net revenue and operating profit. The increased level of direct foreign investment, as indicated by many of foreign companies that establish their plants/opening their branches in Indonesia also supports the growth of construction business that also has a positive impact to the current and future of WIKAs performance.

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Financial Analysis
Figure 1: Ratio Analysis

Source: FE UII Estimates, Company Data

WIKA has average growth for its business offset 20% on net profit until next five years forecasted by fix sales growth at 19.47%. But then, its probability is particular highlight by ROA that reach more than 20% at 2012 forecasted. Also, Net profit margin keeps in stable growth at average 5%. WIKAs efficiency are getting better by its operating profit that forecasted would be increase which means WIKA could achieve more sales with less operating cost. Earnings WIKA recorded Rp.6,370 Million in 3Q12 or 68.88% due to our estimation Rp.9.249 Million in FY12F. We are optimistic that WIKA can reach EPS 77.90 in 2012 and EPS 139.57 in FY16F. Our assumption growth of sales is constant at 19.47% for next five years projections. Net profit growth does not follow the growth of sales caused by the operational costs that increase along the inflation and raw material price. Cash Flow We expect Capex for FY12F decrease from FY11 Rp. 1,966,881 to Rp. 1,117,948 Million. This becomes the effect of the project financing of WIKAs current project, so WIKA issue bond in the end of 2012 to elevate its Capex. The bond issuance gives impact to the increase of net cash flow from Rp. 16,611 Million in FY11 to Rp. 164,093 Million in FY12F. Balance Sheet & Financing We assume WIKA raise one million bonds to finance the power plant at 2013 so that will increase its non current liabilities. Book Value per Share at 2012F forecasted to be 387.30, it means P/BV will turns into 4.55x with shares prices targeted. With ROE > ROA we believe that WIKA still have good performance with net profit margin that offside 4% and even increased until FY2016F.

The 12th ICMSS Investment Analysis

December 17, 2012

Figure 2: Financial Statement Forecast In Million

The 12th ICMSS Investment Analysis

December 17, 2012

Source: Company Data, FE UII Estimations

Investment Risk
Company Risk Risk of government. The order book of PT. Wijaya Karya, Tbk in 2011 is dominated by the order form government and state-owned enterprises (BUMN). The regulation from government might influence WIKA revenue, but since the program of MP3EI (Master Plan for Acceleration and Expansion of Indonesia) from 2011 until 2014 is being run, the government spending on infrastructure still supporting WIKA revenue. Risk of provision for receivable. Delayed payment will increase the amount of account receivable of the company and potentially reduce the cash received. Risk of reputation. The investigation of Hambalang case which is the joint operation (JO) of WIKA and ADHI is elevated to be more serious investigation. However, we hope that this investigation wont affecting WIKAs operation performance. Risk of raw material. The raw material price volatility may reduce the net profit of the company while increase the cost of production. Stock Risk Beta analysis. WIKA shows beta 1.24 which means that WIKA price move 24% more aggressive compare to composite index price changes. It shows that WIKA has more aggressive price movement compared to construction sector which has beta in average 1.03. So we categorize investment in constriction sector as medium risk. Standard Deviation Analysis. By the stock price collected for the last of 52weeks, it shows that WIKA has standard deviation 0.023. It means when Investor keep WIKA stock in a year, the have probability of get abnormal return as much as 2.3%. WIKA win the lowest risk compared to ADHI, TOTL, and PTPP which have standard deviation more than 0.025.

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December 17, 2012

Additional Content
Figure 1: Technical Analysis

Source: Chart nexus, FE UII Research

Bull for long term. From the last closed market at Friday Dec 14th, WIKA stock price has raise 2.07% to Rp 1,480. But then, weekly price still decline after profit taking since the last highest price at Rp 1,650 in the beginning of December. For long term trend since June, WIKA has a good prospect for future. Its chart is still show in bullish position. Arrive at the crossroad. Since the beginning of December, WIKA lost its power to rise up the price higher after riding the bull for six month. Latest trend, it shows that the candlestick formed as double top and currently touches the closest support. Moving average 20 and 50 shows that WIKA still has potential to continue its bullish trend, but then MACD indicator already cross to decline. It means that WIKA stock will decrease limited until the next support at Rp 1,370 and has potential to go back at the trend if the price breakout at Rp 1,650. So, we recommend BUY ON WEAKNESS.

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The 12th ICMSS Investment Analysis

December 17, 2012

Disclosures: Ratings guide: Recommendation as a BUY, HOLD or SELL is explained as follows. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months. Risk category based on BETA that if less than 1.00 and above 0.00 are included as low risk. Medium risk is for BETA that more than 1.00 or less than 1.25, while the high risk is that BETA more than 1.25 or negative. Disclaimer: The information contained in this report has been taken from sources which we deem reliable. However, none of FE UII member makes any representation or warranty (express or implied) or accepts any responsibility or liability as to, or in relation to, the accuracy or completeness of the information and opinions contained in this report or as to any information contained in this report or any other such information or opinions remaining unchanged after the issue thereof. Any recommendation contained in this report may not be suitable for all investors and strictly a personal view and should not be used as a sole judgment for investment. All rights reserved by FE UII.

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