Analyst Report DANAREKSA

NEW ISSUE
7 December 2009
CONSTRUCTION/IPO
EQUITY RESEARCH
Pembangunan Perumahan
Lydia Suwandi (62-21) 350 9888 ext.3508 lydias@danareksa.com
The Transformer
PP is the third largest state-owned construction company in Indonesia, controlling around 3% market share. PP started its construction business by building houses for government employees. And after more than five decades experience, a large number of mega infrastructure projects have been carried out by PP - including the construction of buildings, toll roads, bridges, irrigation facilities and harbors.
www.danareksa.com
7 December 2009
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THIS DOCUMENT IS NOT TO BE ISSUED, CIRCULATED OR DISTRIBUTED IN HONG KONG, EXCEPT: (I) TO PERSONS WHOSE ORDINARY BUSINESS IT IS TO BUY AND SELL SHARES OR DEBENTURES, WHETHER AS PRINCIPAL OR AGENT; OR (II) TO PROFESSIONAL INVESTORS WITHIN THE MEANING OF THE SECURITIES AND FUTURES ORDINANCE (CAP. 571) OF HONG KONG AND ANY RULES MADE UNDER THAT ORDINANCE; OR (III) IN OTHER CIRCUMSTANCES WHICH DO NOT RESULT IN THE DOCUMENT BEING A PROSPECTUS AS DEFINED IN THE COMPANIES ORDINANCE (CAP. 32) OF HONG KONG OR WHICH DO NOT CONSTITUTE AN OFFER TO THE PUBLIC WITHIN THE MEANING OF THAT ORDINANCE. THE PERSON RECEIVING THIS DOCUMENT REPRESENTS AND WARRANTS THAT IF IT RECEIVES THIS DOCUMENT IN HONG KONG IT IS A PERSON FALLING WITHIN (I), (II) OR (III) ABOVE. THE DISTRIBUTION OF THIS DOCUMENT IN OTHER JURISDICTIONS MAY BE RESTRICTED BY LAW AND PERSONS INTO WHOSE POSSESSION THIS DOCUMENT COMES SHOULD INFORM THEMSELVES ABOUT, AND OBSERVE, ANY SUCH RESTRICTIONS. Mandiri Securities, Danareksa Securities DBS Vickers Securities (or an affiliate) has been or may be appointed in connection with the proposed offer (the Offer ) of shares (the Securities) of PT Pembangunan Perumahan (the Company). This document has been produced independently of the Company, its shareholders, the Joint Lead Underwriters and any other member of the underwriting group or any of their respective affiliates. The information and opinions in this document are entirely those of Mandiri Securities, Danareksa Securities DBS Vickers Securities as part of its internal research activity and not as a manager or underwriter of the Offer or as an agent of the Company, its shareholders or any of their affiliates or any other person. Mandiri Securities, Danareksa Securities DBS Vickers Securities has no authority whatsoever to make any representation or warranty on behalf of the Company, its shareholders, Joint Lead Underwriters or any of their affiliates in connection with the proposed Offer or otherwise. While the information in this document and the opinions are based on sources believed to be reliable, [syndicate member] has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, and none of the Company, its shareholders, the Joint Lead Underwriters, Mandiri Securities, Danareksa Securities DBS Vickers Securities, any other member of the underwriting group or any of their affiliates or any of their respective directors, members, officers or employees shall have any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. This document does not constitute or form part of the Offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, the Securities or any other securities nor shall it or any part of it form the basis of, or be relied on in connection with, or act as an inducement to enter into, any contract or commitment whatsoever with respect to the Offer or otherwise. Accordingly, any decision in connection with the acquisition of Securities pursuant to, or in connection with, the Offer must be made solely on the basis of the information contained in the formal final offer document or other information document prepared or to be prepared by the Company for issue in connection with the Offer. Mandiri Securities, Danareksa Securities DBS Vickers Securities (or its officers, directors or employees) may, to the extent permitted by law, have acted upon or used the information herein contained before the publication of this report and may have a position in the Securities or other securities of (or options, warrants or rights with respect to, or interest in, the Securities or other securities of) the Company and may make a market or act as a principal in any transactions in such Securities or other such securities. Mandiri Securities, Danareksa Securities DBS Vickers Securities may from time to time perform investment banking or other services to, or solicit investment banking or other business from, the Company. THIS DOCUMENT HAS BEEN FORWARDED TO YOU SOLELY FOR YOUR INFORMATION AND MAY NOT BE REPRODUCED OR REDISTRIBUTED TO ANY OTHER PERSON. BY ACCEPTING THIS DOCUMENT YOU AGREE TO BE BOUND BY THE FOREGOING LIMITATIONS.
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7 December 2009
TABLE OF CONTENTS
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Executive summary Overview Valuation Risks factors Construction sector outlook Company profile Financial highlights
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7 December 2009
Executive Summary
Construction: the companys bread and butter PP is the third largest state-owned construction company in Indonesia, controlling around 3% market share. PP started its construction business by building houses for government employees. And after more than five decades experience, a large number of mega infrastructure projects have been carried out by PP - including the construction of buildings, toll roads, bridges, irrigation facilities and harbors. Proven track record in high rise buildings Jakarta has been the showroom of PPs high rise building projects, namely the completion of Hotel Indonesia in 1962, a 14-storey building with 427 rooms which, at the time, was the highest building in Indonesia; new constitutional court buildings; the new FX lifestyle center on Sudirman Road; the Wave Apartment in Kuningan, Sampoerna Strategic Square, the Kelapa Gading Mall in Jakarta, the Medan Fair in North Sumatera and many other government department buildings. Going forward, we should expect the demand for high rise buildings (especially CBD office buildings) to remain stable. We notice that demand for high rise buildings and specifically CBD office buildings are negatively correlated with declining interest rates. In addition, the building permit index for Sept-09 shows an increasing trend Benefiting from joint operations Other than high rise buildings, some of PPs mega projects (contracts worth more than Rp 500bn) were secured through Joint Operation projects. With joint operations, PP will have a good chance of securing some contracts from companies which have a greater chance of winning the tender. Prudent selection of JO is also key to why the companys JO are more profitable than others. A good strategy and proven track record should help the company to secure more projects in the future. Hence, we expect the companys revenues from its core business to grow by 19.4% CAGR in FY08-11F with a gross margin after JO of 9.2%-9.3% in FY09-11F Better cost control means higher margins Cost efficiency has always been the main focus of PP. The management has been applying value engineering to create more efficiency in the construction process. On top of that, PP has been benefiting from greater economies of scale. This has pushed down the opex to sales ratio from 2.8% in FY06 to 2.1% in FY08. As a consequence, the companys operating margin is higher than the operating margin of other state owned construction companies. Going forward, we expect costs to remain under tight control, and therefore operating margins can be maintained at 7.1%-7.2% in FY09-11F. To become an investment company as well PP has set its sights on becoming an investment company as well as a construction company. Thus, PP plans have stakes in some valuable infrastructure projects such as power projects, toll road projects, mining projects, etc. The impact of this strategy in our view is: 1) PP will get the construction work of the projects without going through a tender process; 2) the margins for construction will be more secure; 3) there will be additional recurring revenues for PP when the projects start to operate. According to PPs management there are investment opportunities in power plants (US$ 1.08bn); mining (US$40mn), toll roads (US$1.3bn), railways (US$1bn), and harbors (US$265mn). Valuation We estimate PPs equity value to range between Rp 1.7trn-2.6trn, implying 12.0-6.5x and 18.510x FY09-10F PER. This valuation is based on: 1) the discounted cash flow (income approach) assuming a WACC of 11.4%, Long Term Growth of 5%; and 2) the relative valuation (market approach) using listed construction companies in Indonesia.
7 December 2009
Overview
PP is engaged in three business areas: 1. Construction 2. Property 3. Investment Construction: the companys bread and butter With a proven track record of more than 50 years, PP has evolved from being a contractor which builds houses for government employees to being a well-known contractor for the construction of high rise buildings. These include the new constitutional court buildings; the new FX lifestyle center on Sudirman Road; the wave apartment in Kuningan, Sampoerna Strategic Square, Kelapa Gading Mall in Jakarta, Medan Fair in North Sumatera and many other government department buildings. Other achievements in non-building projects are the cable-stayed bridge connecting Batam-Tonton, Asahans Dam, a power plant in Cirata, West Java, and Padalarangs toll road. About 97% of the companys revenues are contributed from construction services and PP is currently the third largest state-owned construction company in Indonesia controlling around 3% market share.
Exhibit 1. PPs business segments
Construction
Investment
Property
High rise building
Infrastructure
Commercial Center Harbor Dam
Apartment
Building Power Plant
Toll road Offices Hydro Electric Hotel
Source: Company
7 December 2009
Exhibit 2. Construction market share

ADHI 7% WIKA 7% PP 3% Waskita 3% Others 73% JKON 3% TOTL 2%
DGIK 1%
Source: Companies
Exhibit 3. Revenues breakdown by type of project

Building Infrastructure Realty & property
3% 24%
73%
Source: Company
In the past four years the company has managed to record growth of 20% CAGR from new contracts awarded. Of the new contracts, 97% were government projects as of Jul-09. PP has benefited from being a SOE construction company, especially in 2008 when many private sector projects were delayed due to unfavorable market conditions. We also notice that demand for high rise buildings and specifically CBD office buildings are negatively correlated with declining interest rates. In addition, the building permit index for Sep-09 shows an increasing trend. Thus, we should expect the demand for high rise buildings (especially CBD office buildings) to remain stable with the BI rate at an all time low.
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Exhibit 4. Large sized projects from the government & SOE

Government & Related 100% 41% 61% 97% 59% 39% 69% 68% 31% 32% Private 3%
75%
51%
50%
25%
49%
0% 2004
Source: Company
2005
2006
2007
2008
Jul-09
Exhibit 5. New contracts have grown 20% CAGR in 4 years

Rp bn Jul-09 2008 2007 2006 2005 2004 2,955 3,524 3,515 5,190 4,623 6,129
Source: Company
7 December 2009
Exhibit 6. Past Projects completed
Cable stayed bridge :Batam-Tonton
Pelabuhan Ratu Harbor -Precast-
Dam & Power Plant
Apartment & Mall
Source: Company
Exhibit 7. Demand for CBD office are negatively correlated with declining interest rates
%
Demand growth
Average SBI 1mo
16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09
Source: Procon, CEIC, Danareksa Sekuritas
7 December 2009
Exhibit 8. Building permit index for residential and commercial from Jan04 to Sept09
3,000 2,500 2,000 1,500 1,000 500 May-04 May-05 May-06 May-07 May-08 May-09 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Jan-09 Sep-09
Source: Danareksa Research Institute
Benefiting from JO operations With regard to the highly fragmented construction businesses in Indonesia where there are 98,000 contractors and with 1% of the contractors accounting for 60% of the market revenues, maintaining margins is not easy. During 2008, profitability was also dented by the application of the new 3% final tax regulation. Hence, PPs net margin declined from 3.1% FY08 to 1.1% in 7M09. Thus, increasing the revenues by securing more new contracts with reasonable margins is crucial. Another way to secure more projects is through Joint Operations. PP prefers Joint Operations as the subcontractor if they dont have major expertise in the projects. Joint operation projects sometimes involve mega projects where large amounts of capital are needed and not many contractors can be entrusted to develop the projects. This strategy has proven successful, we believe, with around 1% of PPs total accounting revenue regularly coming from joint operation profits. Prudent selection of JO is key to selecting profitable projects. Up to Oct-09, the company has secured Rp 4.6Trn worth of contracts (including JO) or 56% of PPs full year target of Rp 8.1Trn for FY09F. The company also has Rp 4Trn worth of mega projects that are currently under construction and expected to be completed by 2010-2011. Going forward, construction activity for infrastructure should increase further and the company will be the prime beneficiary since most of it comes from government infrastructure projects (see: construction sector outlook). The assumption is that PP will continue to grow organically (excluding the profit from the Joint Operation) by increasing its new contract target by 20% each year until 2011. And each year around 53% of the total order book will be booked as revenues in the current year. This should support a CAGR of 19% for revenues from the construction businesses in FY08-11F.
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Exhibit 9. PPs profits from Joint Operations compared to its peers

Rp bn 80 70 60 50 40 30 20 10 (10)
Source: Companies
ADHI
WIKA
TOTL
PP
JKON
DGIK
2006
2007
2008
Exhibit 10. Assumed total order book for 2009-2014F

Rp bn
New contract
Carry over
Order book
25,000 20,000 15,000 10,000 5,000 2009F 2010F 2011F 2012F 2013F 2014F
Source: Company, Danareksa Sekuritas
Exhibit 11. Revenues from construction

Rp bn
Revenue (LHS)
Growth yoy (RHS) 35% 30% 25% 20% 15% 10% 5% 0%
7,000 6,000 5,000 4,000 3,000 2,000 1,000 2006 2007 2008 2009F 2010F 2011F
Source: Company, Danareksa Sekuritas
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Exhibit 12. Some of PPs mega projects under construction

Projects Siak Raya Merempan Hulu East canal 27 DPRD office Water irigation Komering Stage I Water irigation Komering Stage II Subisidized apartment in Kelapa Gading Palaran Harbor in Samarinda Water supply stage IV Medical faculty of Syarif Hidayat Flood control-Mookevart Governor office in Banjar Baru University of Alauddin Makassar Department of religion stage III Jakarta-Cikampek toll road stage II University of Diponegoro Teaching hospital UNHAS stage II Construction works for Paiton 3 expansion Kariangu Harbor TMTC Rasuna Epicentrum University of communication Bandung Central Bureau of statistic Total Source: Company Project value ( Rp bn) 76,162 170,743 58,313 73,875 76,826 537,171 228,500 60,747 74,532 89,771 161,484 254,900 77,567 63,884 248,338 64,723 190,936 229,777 209,999 79,818 47,994 3,076,058 Target completed Dec-09 May-10 Jun-10 Dec-09 Dec-09 Jun-10 May-10 Dec-09 Dec-09 Jun-10 Nov-10 Feb-10 Oct-09 Dec-09 Jul-07 Nov-09 Jan-11 Dec-11 Feb-10 Jun-10 Oct-09
Better cost control means higher margins Cost efficiency has always been the main focus of PP. In this regard, the management has been applying value engineering methods to create more efficiency in the construction process. On top of that, PP has benefited from greater economies of scale where the ratio of opex to sales has declined from 2.5% in FY05 to 2.1% in FY08. As a consequence, the companys operating margin is higher than that of other state-owned construction companies. Exhibit 13. Operating margin expansion from greater economies of scale
Rp bn
Operating Profit (LHS)
Operating margin (RHS) 7.6%
700 600 500 400 300 200 100 2005 2006 2007 2008 2009F 2010F 2011F
*
7.2%
6.8%
6.4%
6.0%
Source: Company & Danareksa Sekuritas
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Exhibit 14. Enjoying higher operating margins than other state owned companies
8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2006 2007 2008
ADHI
WIKA
PP
* PP based on 7M09 results Source: Companies and Danareksa Sekuritas
Investment: icing on the cake PP has also set its sight on becoming an investment company. Thus, PP plans have stakes in some valuable infrastructure projects. We believe this is a sound strategy since: 1) PP would get the construction work of the projects without having to go through a tender process; 2) margins for construction would be better secured; 3) there would be additional revenues for PP when the projects start to operate. 2X150MW Coal Fired Power Plant in Cilegon According to PPs management, a feasibility study has already been conducted for the 2 X 150MW Coal Fired Power Plant (CFPP) in Cilegon. PP will be the developer and be incorporated with PT Krakatau Daya Listik (KDL) as the buyer of the CFPPs electricity for a contracted 30 years. Then the plant will be taken over by PT. KDL (on a BOT basis). Krakatau Daya Listrik (KDL) is a subsidiary of PT. Krakatau Steel. KDL is responsible for developing infrastructure - especially in regard to electricity provision for the Krakatau Industrial Estate in Cilegon. Thus, in view of the projected deficit of electricity supply in that region, KDL sought offers to build a 300MW coal fired power plant (CFPP). The 300MW steam powered plant will be constructed over an area of 43Ha in Cilegon and located on the west coast of Java where transportation for the coal is at the shortest distance from South Kalimantan or East Kalimantan as the coal source. PP will team up with non affiliated third party investors in this CFPP consortium. PP plans to own up to a 90% stake in the power plant by the time the CFPP is ready to operate. PP will also act as the developer for constructing the power plant valued at an estimated Rp 3trn. Financing will come from equity and up to 90% debt. The construction will take around 2 years. Then KDL will act as the buyer of the CFPPs electricity for the contracted 30 year period before it is taken over by KDL (on a BOT basis). We only take into account the revenues from the construction work of CFPP assuming 20% of the construction process will be completed in 2010, 40% in 2011 and the rest in 2012. And since the company can easily secure this project without going through a tender process, we should expect higher margins than its regular projects of around 10% from the construction work.
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Based on our DCF calculation with a 30 year contract period of discounted free cash flow and WACC of 11.4%, the CFPP project is worth Rp 247bn with an IRR of 12.5%. Exhibit 15. WACC assumption for CFPP in Cilegon
Risk free rate Cost of equity Cost of debt Statutory tax rate Target D/DE WACC Source: Danareksa Sekuritas 8.0% 13.0% 7.7% 30.0% 70.0% 11.4%
Exhibit 16. WACC sensitivity to the value of CFPP

WACC 9.4% 10.4% 11.4% 12.4% 13.4% Souce: Danareksa Sekuritas Rp bn 816 507 247 26 (162)
Going forward, the management said that the company would invest in other infrastructure projects such as toll roads, railway, power plants, mining projects and investment property (in Jakarta, Bandung, Surabaya, Semarang and Bali). The company estimates that around $111.3mn worth of investment projects are in the pipeline up to 2011. Exhibit 17. Investment projects in the pipeline (2010-2011)
Projects Infrastructure Energy Mining Property Total Source: Company Rp bn 333 366 220 194 1,113
Property and real estate business PP has also diversified its business into property and the real estate businesses. The businesses include rental office space at Plaza PP and realty business developments in the area of Cibubur. Some of PPs development projects have been sold, namely: Juanda Business Center, Surabaya; Patria Park, Jakarta ; Paladian Park, Jakarta; Bukit Permata Puri, Semarang; Graha Bukopin, Surabaya; Trade Center Kampas Krampung, Surabaya. Offices across the country PP has three operational division offices and eight branches in strategic locations across Indonesia. This makes it easier for PP to make the most of new project opportunities (both government and in the private sector).
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Exhibit 18. PPs operational area

Divisi Operasi I Cabang I : Aceh, Sumatra Utara Cabang II : Lampung, Bengkulu, Sumsel, Bangka-Belitung & Banten Cabang IX : Sumatra Barat, Jambi, Riau , Batam Sumatra Sulawesi Kalimantan Maluku Divisi Operasi III Cabang V : Jawa Tengah, Jawa Timur, DIY Cabang VI : Kalimantan Cabang VII : Bali, NT, Maluku, Papua Sub Cabang VII : Sulawesi
Papua
Jawa Bali dan Nusa Tenggara
Divisi Operasi II Cabang III : Jakarta Cabang IV : Jawa Barat
Source: Company
Exhibit 19. PPs construction business operation phases

Prequalification Compile Information on new projects Fulfill requirements from projects owners Tender Receive tender document Review document Value engineering Submit offer Negotiation Contract awarded Project execution Project management Cost control Purchase and procurement (incl. subcontractor) Quality management Safety, Health& environment Inspection QHSE Project hand over Cost Hand over 1 Hand over 2 Customer satisfaction questionnaire
Time
Source: Company
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Commitment to quality PP has obtained ISO 9001:2008 certification, the international quality standard for quality management systems. The company also holds OHSMS 18001 (the Occupational Health and Safety management standard) and EMS 14001 (Environmental Management System), depicting its commitment to producing high quality buildings and infrastructure. PP is the only Indonesian contractor which is a founder of the Green Building Council of Indonesia. PP declared itself as the first Indonesias green contractor in August 08. PP has since been entrusted by project owners to develop projects with a green concept. Two buildings were constructed by PP with green building specifications, something other contractors have not yet done.
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Valuation
We estimate PPs equity value to range from between Rp 1.7-2.6trn, based on discounted cash flow (income approach) and relative valuation (market approach). Our rationale for using the discounted cash flow method is as follows: 1. To capture the long term income from the current investments and to take into account the costs incurred to generate such returns. Our DCF method includes any reinvestment of earnings; 2. To measure PPs ability to sustain its long term return as well as sustain its long term earnings growth. Our long term forecast only includes the companys organic business and revenues from one of its investment projects totaling Rp 3trn (spread over the period 2010-2012). Meanwhile, our rationale for using the comparative multiples method is as follows: 1. To capture the short term earnings to reflect the current economic conditions. We believe any earnings forecast beyond two years is speculative in nature; 2. To gauge PPs position relative to its peers Exhibit 20. Valuation matrix
Methodologies Equity value Rp bn 2,513 2,066 1,691 2,596 Implied PBV, x FY09E FY10E 2.2 1.8 1.5 2.3 1.9 1.5 1.2 1.9 Implied PER, x FY09E FY10E 17.9 14.7 12.0 18.5 9.7 8.0 6.5 10.0
DCF Sector average PER multiple Sector average PEG multiple Weighted Average Rolling PER Source: Danareksa Sekuritas
Discounted Cash Flow Our DCF valuation yields an estimated equity value of Rp 2.5trn, assuming an 11.4% WACC and 5% nominal long term growth (the expected nominal GDP growth). We have also assumed that PP will implement its strategies effectively and that any earnings growth will come organically. In calculating our equity value, we have made several assumptions: 1. We have assumed an equity beta of 1 given that individual stocks tend to follow the market movements in the longer run. The unlevered beta will be similar to other construction companies given that most construction company are highly leveraged. 2. We use a risk free rate of 9% and set our equity risk premium at 7% (the difference between the 10 year Indonesian government bond yield and the US 10-year T-bond yield of about 3.4%). 3. We have assumed a tax rate of 40%, the likely effective tax rate due to new tax regulations (3% final tax on top line revenues). 4. Finally, we assume a long term nominal growth rate of 5% (the estimated long term GDP growth rate). We have conducted a sensitivity analysis on our equity valuation, assuming a 1% differential for WACC and terminal growth. While there is no definitive pattern on the changes in those key variables, we estimate that a 1% increase in WACC will lead to a 16% decline in our equity value, while a 1% decline in WACC will lead to a 21% increase in our estimated equity value. As for the changes in the long term growth rate, a 1% increase will lead to a 16.9% increase in our estimated equity valuation, while a 1% decline will lead to a 12.3% lower equity valuation.
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Exhibit 21. Sensitivity analysis of our DCF derived equity value to changes in WACC and terminal growth (Rp bn)
Nominal LT growth WACC, % 11.4% 1,967 2,203 2,513 2,938 3,560
9.4% 3.0% 4.0% 5.0% 6.0% 7.0% 2,710 3,168 3,836 4,902 6,877
10.4% 2,288 2,609 3,050 3,694 4,723
12.4% 1,716 1,894 2,122 2,421 2,831
13.4% 1,513 1,652 1,824 2,044 2,332
Source: Danareksa Sekuritas
Exhibit 22. Our DCFs implied FY10 PBV multiple, x

Nominal LT growth WACC, % 11.4% 1.5 1.6 1.9 2.2 2.6
9.4% 3.0% 4.0% 5.0% 6.0% 7.0% 2.0 2.3 2.8 3.6 5.1
10.4% 1.7 1.9 2.3 2.7 3.5
12.4% 1.3 1.4 1.6 1.8 2.1
13.4% 1.1 1.2 1.3 1.5 1.7
Exhibit 23. Our DCFs implied FY10 PER multiple, x

Nominal LT growth WACC, % 11.4% 7.6 8.5 9.7 11.4 13.8
9.4% 3.0% 4.0% 5.0% 6.0% 7.0% 10.5 12.3 14.8 19.0 26.6
10.4% 8.9 10.1 11.8 14.3 18.3
12.4% 6.6 7.3 8.2 9.4 11.0
13.4% 5.9 6.4 7.1 7.9 9.0
Relative valuation Based on our relative valuation, we arrive at an equity value of Rp 1.7-2.6Trn Unless otherwise stated, we have used consensus estimates. We have applied a comparative analysis based on three variables. They are: 1) the price earnings multiple, PER, 2) the PEG ratio, and 3) weighted average rolling PER. We have opted to use comparable listed construction companies in Indonesia considering that they are exposed to the same projects and the cyclical nature of Indonesias construction industry, regulations, and market risk. We also show regional valuations for the purpose of comparison. Worth noting is that regional construction companies are currently trading at a premium to domestic ones. This is partly due to their larger market cap, we believe. We have averaged the multiples, taking account of each companys market cap. Specifically for the PEG ratio, we have used the estimated 3-yr CAGR earnings growth and FY08s earnings estimates to avoid double counting of growth. We also apply a 40% discount to take into account the possibility of delays in construction works.
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Exhibit 24. Relative valuation based on domestic construction companies

Companies ADHI IJ Equity WIKA IJ Equity TOTL IJ Equity Weighted average sector PP equity valuation Implied FY10 PBV Price 405 315 193 Mkt cap Rp bn 730 1,842 531 FY10 PER x 7.32 7.77 9.70 8.00 2,066 1.53 FY10 PEG x 0.97 0.49 0.21 0.55 1,691* 1.25 Rolling PER 8.39 10.24 11.67 10.05 2,596 1.92
* 40% discount to PEG multiple to take into account any possibility of delay Source: Bloomberg, price as of 3 December 2009, Danareksa Sekuritas
Exhibit 25. Comparison with Domestic valuation

Price (Rp) ADHI IJ Equity WIKA IJ Equity TOTL IJ Equity Weighted average 405 315 193 Mcap (US$mn) 78 196 56 PBV, x 2009E 2010E 0.9 1.2 1.1 1.1 1.0 1.1 1.2 1.1 PER, x 2009E 2010E 8.4 10.1 11.0 9.8 7.3 7.8 9.7 8.0 ROE, % 2009E 2010E 12.4 12.3 10.3 12.0 11.4 14.8 10.7 13.3 ROA, % Div. yield 2009E 2010E % 2.0 3.0 3.6 2.9 1.5 3.9 4.1 3.3 3.0 2.5 1.1 2.4
Source: Bloomberg, price as of 3 December 2009, Danareksa Sekuritas
Exhibit 26. Comparison with regional valuation

Bloomberg Code GAM MK Equity IJM MK Equity CK TB Equity STEC TB Equity Weighted average Price (USD) 0.82 1.33 0.17 0.18 Mcap (US$ mn) 1,644 1,761 251 208 PBV, x 2009E 2010E 1.8 0.9 1.5 1.5 1.4 1.7 1.2 1.5 1.4 1.4 PER, x 2009E 2010E 28.1 13.9 34.7 29.2 22.1 16.6 17.8 28.9 19.5 18.1 ROE, % 2009E 2010E 6.7 6.2 5.1 5.5 6.3 10.7 6.5 5.8 7.8 8.3 ROA, % Div. yield 2009E 2010E % 3.6 3.0 1.4 2.1 3.1 5.2 2.7 1.5 3.4 3.7 2.7 4.6 1.2 0.6 3.3
Source: Bloomberg, price as of 3 December 2009, Danareksa Sekuritas
Exhibit 27. Weighted average rolling PER, x

70.0 60.0 50.0
Exhibit 28. Weighted average rolling PBV, x

6.0 5.0 4.0
40.0 30.0 20.0 10.0 Jan-07 Jan-08 Oct-07 Oct-08 Jan-09 Apr-07 Apr-08 Apr-09 Oct-09 Jul-07 Jul-08 Jul-09 0.0 10.5
3.0 2.0 1.1 1.0 0.0
Dec-07
Mar-07
Mar-08
Jan-07
Nov-08
Jun-07
May-08
May-09
Sep-07
Feb-09
Source: Danareksa Sekuritas and Bloomberg
Source: Danareksa Sekuritas and Bloomberg
Aug-08
Oct-09
Jul-09
19
7 December 2009
Exhibit 29. PPs implied FY10F PBV & PER multiples comparison with domestic peers
FY10 PER x 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 PBV,x 1.5 ADHI WIKA Simple avg = 8.3x TOTL Simple avg = 1.1x
Source: Danareksa Sekuritas, Bloomberg
Exhibit 30. PPs implied FY10F PER & ROE comparison with domestic peers
FY10 PER x 10.0 9.0 8.0 7.0 6.0 ROE,x 5.0 10.3 11.3 12.3 13.3 14.3 ADHI Simple avg = 8.3x WIKA TOTL Simple avg = 12.3x
Source: Danareksa Sekuritas, Bloomberg
20
7 December 2009
Risks factors
1. Fewer government & related projects. Government expenditure for infrastructure projects is strongly related to Indonesias economic growth. A significant decline in the infrastructure budget will reduce the availability of new projects. 2. Increase in the prices of raw materials Last years increase in crude oil prices resulted in significant increases in the costs of raw materials like cement and steel which together constitute around 20% of the total cost of production. As a result, some projects were delayed and even cancelled. If prices of raw materials surge again, the companys profitability and cash flow could be adversely affected. 3. Possible delays in the completion of projects Costs will increase if projects are delayed. Moreover, the companys reputation is also at stake with possible negative ramifications on the company in the long term. 4. Tighter competition The ability of the company to maintain its current market share will really depend on the companys success in securing new projects. There is the risk that the target for new contracts would not be achieved. This would lead to lower profitability. 5. Default risk There is the possibility that the project owners cannot make the required payment for the construction work. If that is the case, the companys profitability might suffer, both in the short term and the long term, depending on the amount of the contract. 6. Execution risk in investment projects A lack of competent management or expertise in controlling the investment projects would potentially reduce the profitability of the projects. Thus, as the company plans to be the majority shareholder in the investment projects (except for the toll road projects), the companys profitability would be at risk. 7. Conflicts with the shareholders At the construction phase of an investment project, PP would be a minority shareholder. After the project is ready to be operated, the company would hope to become a majority shareholder. But if the company doesnt have any substantial experience or expertise in running the business, PP might not be able to compete effectively.
21
7 December 2009
Construction sector outlook

The Indonesian construction sector: an engine of economic growth Due to the global economic recession which hit Asian exports and led to financial instability, half of the Southeast Asian economies are projected to shrink this year. The Asian Development Bank expects the GDP growth in Southeast Asia to slow from 4.1% in 2008 to just 0.1% this year. However, Indonesia is performing much better than expected and the GDP growth is expected to reach 4.7% in 2009F, outperforming the other major economies in Southeast Asia. We believe that this growth shall partly be driven by government spending coupled with domestic fiscal stimulus to foster infrastructure development. Exhibit 31. Indonesia is outperforming other major economies in Southeast Asia
GDP growth 2008 2009F 2010F
Vietnam Thailand Singapore Phillipines Malaysia Indonesia -6.0

Source: ADB
%
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Over the past few years, the government has shifted its spending to more productive areas including labor intensive infrastructure works. More than Rp 1,200trn has been spent in the past 4 years to develop infrastructure. As a result, construction GDP grew 31% CAGR over the past 4 years, making up an increasing portion of overall GDP (up from 6.1% in FY05 to 10.6% in FY08). Exhibit 32. Central government expenditure has been allocated to more productive areas
% 14 12 10 8 6 4 2 0 2005 2006 2007 2008 Material Working capital
Source: CEIC
22
7 December 2009
Exhibit 33. as a result the percentage of construction to GDP is increasing

GDP construction, Rp bn (LHS) 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 2002
Source: CEIC
% of GDP (RHS) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
2003
2004
2005
2006
2007
2008
Population growth means more infrastructure is needed We believe there is still plenty of room for growth in the construction sector since the existing infrastructure is not sufficient. This is due to Indonesias unbalanced development whereby most of the infrastructure and economic development has been focused in urban areas. Consequently, there is likely to be more urbanization. The United Nations Population Division is projecting that by 2025F the number of people living in urban areas shall reach 179mn and that number will grow by another 32% by 2050F to 236mn people. This means that as more people migrate from the countryside to urban areas, the need for construction and development of urban infrastructure, commercial and residential areas will continue to grow. Exhibit 34. More and more people will migrate to urban areas
mn
Urban
Rural
350 300 250 200 150 100 50 0 2007

Source: UN population division
61 92 115 236 179 117
2025F
2050F
23
7 December 2009
The present mediocre infrastructure needs to be improved l Traffic volume vs road improvement Commuting is a fact of life for urban people. In Jakarta, for example, toll road traffic volume had reached 881mn vehicles in 2008, up 3% from 2007. This indicates increasing mobilization. However, the increasing mobilization has not been accompanied by better road development. Based on our data, Indonesias traffic volume grew by 17% cagr in 2001-2006, while the length of roads only grew 2% cagr during those years. As a result, traffic is becoming worse by the day. Exhibit 35. Indonesian traffic volume growth has increased at a faster rate than road improvements
30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 2000 2001 2002 2003 2004 2005 2006 4% 0.0% 1.6% 1.8% 0.6% 0.7% 1.3% 10% 10% 16% 15%
Road
Vehicles
24% 18%
4.2%
Source: CEIC
l
Energy crisis in Indonesia The low electrification ratio of 62% shows that there is inadequate electricity supply in Indonesia. It also indicates the intrinsic growth potential for the power supply businesses. Based on PLNs forecast, there will be more than 9% p.a. projected demand growth over the next few years. Some 80% of the demand for electricity is in the densely populated islands of Java and Bali. These two islands also have nearly three quarters of the countrys total generating capacity. Through the governments fast track program, some 10 coal fired power plants will be built in Java-Bali and another 23 in other areas with total output of approximately 9.5GW. The timetable for these projects is that they are largely completed by 2011. The new power plants will be coal fueled since coal is cheaper than oil fuel. Under its ambitious plans, Indonesia hopes to add 57.4GW of generation capacity up to 2018 (PLN 35.3GW and the independent power producers 22.2GW).
24
7 December 2009
Exhibit 36. Indonesias electrification ratio
Source: PLN
Exhibit 37. Projected Indonesian energy demand 2009-2018

TWh 350 300 250 200 150 100 50 0 2007 2009 2010 2012 2014 2018 Indonesia Java-Bali Outside Java - Bali
Source: PLN
25
7 December 2009
Exhibit 38. Fuel cost comparison (Rp/Kwh)

Coal 2,500 2,000 1,500 1,000 500 2006 2007 2008 1Q09 Natural Gas Oil fuel
Source: PLN
Exhibit 39. Power generation development plans

MW 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 350 3,117 7,740 3,192 3,486 2,071 3,472 2,088 1,435 3,490 4,705 2,825 3,289 1,552 2,963 3,202 2,861 2,879 1,358 934 PLN IPP
Source: PLN
The future of Indonesias construction industry Going forward, construction activity should increase further. Positively, the government is encouraging investment in infrastructure projects by seeking private sector participation in Public Private Partnerships (PPP) to lighten the burden of financing its infrastructure program. According to Indonesias National Development Planning Agency (Bappenas) there are 87 projects on PPPs books, consisting of 8 projects ready to be offered, 18 priority projects and 61 potential projects with total investment of US$ 34.2bn. The projects include the construction of toll roads, water supply facilities, sanitation infrastructure, transportation infrastructure and power projects. In a welcome development on the political front, a new presidential unit has been established to help improve coordination between the various ministries. It is hoped that this new initiative will resolve many of the bottlenecks that are holding back Indonesias economic growth. This would include the overhauling of Indonesias inefficient and overstaffed civil service, cutting bureaucracy and pushing through big infrastructure projects ranging from toll roads and railways to ports and power plants. All in all, we expect total GDP from construction to double by 2020F.
26
7 December 2009
Exhibit 40. GDP from construction will reach Rp xxbn by 2020F

% 10.0 8.0 6.0 4.0 2.0 0.0 2009F 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2006 2007 2008 GDP Construction (RHS) Growth, % (LHS) Rp bn 300,000 250,000 200,000 150,000 100,000 50,000 -
Source: Danareksa Research Institute
Exhibit 41. Public private partnership infrastructure projects ready to be offered

Projects 1 2 3 4 5 6 7 8 Tanah ampo cruise terminal, Karang Asem State Java Coal Fire Steam Power (2000MW) Palaci-Bangkuang Railway Soekarno Hatta ariport- Manggarai railway Medan-Binjai toll road Medan-Kualanamu-Tebing Tinggi Toll road Cileunyi-Sumedang-Dawuan toll road Water supply Bandung Municipal (Cimenteng) Total Investment Initiator Local Local Central Central Central Central Central Local Cost (US$ mn) 24 2000 740 700 129 476 395 54 4,518
Source: National Development Planning Agency
Exhibit 42. Public private partnership priority projects

Projects Toll Road Water Supply Sanitation Total Investment Cost US$mn 2,474 500 120 3,094
Source: National development planning agency
Exhibit 43. Public private partnership potential projects

Projects Toll road Transportation Water Suplly Power Total Investment Cost US$mn 11,774 13,030 105 1,695 26,604
Source: National development planning agency
27
7 December 2009
Company profile
Brief company profile PP was established in 1961 as a property construction firm. Since then it has diversified its business into the construction of high rise buildings, toll roads, bridges, and harbors. PP is the third largest construction company in Indonesia. 51% of PP shares are owned by the Government of Indonesia. PP also has a number of subsidiaries and joint operations with other firms which should help the company expand.
Exhibit 44. Key milestones
Established under the name NV PP
Changed & become PT PP (Persero)
Consolidate post economic crisis
1962
1991
2008
1953
1971
1998
Completed the construction of Hotel Indonesia
Diversified its business to office rental and realty
EMBO program
Source: Company
Management team Ir. Musyanif, CEO l Past experience includes Manager of Marketing and Technical Operations (1998-1999), Technical Director (1999-2004) l Earned Bachelor Degree in Civil Engineering (1979) from University Teknologi Surabaya Ir. Tumiyana, CFO l Past experience includes Head of Cabang III (2000-2004), Head of Operations in the main office (2004-2008). l Earned Bachelor Degree in Civil Engineering from University Borobudur (1994) and Masters Degree in Management from IPWI (1997) Ir. Kiswodarmawan, COO l Past experience includes Head of Construction Division I of PT Adhi Karya (2001-2006), Director of Operations I of PT Adhi Karya(2006-2008) l Earned Bachelor Degree in Civil Engineering (1979) from Institute of Technology Surabaya
28
7 December 2009
Ir. Agus Priyambodo, MM, PhD, Human Resource and Development Director l Past experience includes CEO of PT MPI and Director Assistant of PT PP(1997-2001), CEO of PT PP-Taisei (2001-2003) l Earned Bachelor Degree in Civil Engineering from Brawijaya University (1980), Masters Degree in Finance Management from PPM (1996), and PhD in Business Administration from Kennedy Western University, USA (1998) Ir. Ketut Darmawan, Marketing Director l Past experience includes Head of the Marketing Division (1995-2006) l Earned Bachelor Degree in Civil Engineering from Institute of Technology Bandung (1983) Exhibit 45. Current shareholders composition
Negara Government Republik of Indonesia Indonesia
51,00%
Koperasi Karyawan Pemegang KKPS / employee Saham Pembangunan Perumahan

49,0%
PT PP (Persero)
4,67%
15,00%
12,50%
PT Mitracipta Polasarana
PT PP Taisei Indonesia Construction
PT Citra Waspphutowa
Source: Company
Exhibit 46. List of awards

Year 1978 1983 1995 1996 2000 2001 2003 2004 2005 2006 2008 Source: Company Awards International Federation of Asian and Western Pacific Contractors Association (IFAWPCA) Gold Medal for Civil Engineering Construction Award from PT Indonesia Asahan Aluminium IFAWPCA Gold Medal for Building Construction Achievement of a record cycle of 2 Day 19 Hours and 40 Minutes for Batam-Tonton cable stayed bridge Award from CBN (Christian Broadcastin Network) Award from Bank Jawa Barat BUMN and CEO BUMN Award 2003 from LM-FEUI Karya Konstruksi Indonesia from Indonesia ministry of public works Best contractor from Jaya Realty Indonesia Construction Association Award The best BUMN 2008- Investment and Finance magazine
29
7 December 2009
Financial highlights
Macro indicator
2007 GDP, ( % YoY Growth) Inflation rate, e.p. BI Rate, %, e.p. Lending Rate: working capital, %, e.p. Exchange rate, e.p. Source: Danareksa Research Institute 6.3 6.6 8.0 13.0 9,419 2008 6.1 11.1 9.3 15.2 10,950 2009F 4.7 3.6 6.5 12.2 9,845 2010F 6.0 6.0 6.5 11.9 9,998 2011F 6.1 6.2 6.8 11.4 10,076
Balance Sheets, Rp bn
2007 Cash and cash equivalent Short term investment Account Receivable Invetories Advances Fixed assets Others Total Assets Short term bank loan Medium Term notes Advances from project owners Unearned revenue Trade payables Others Total Liabilities Minority Total Equity Source: Company and Danareksa Sekuritas 185 13 1,147 180 267 104 204 2,100 326 100 262 2 985 91 1,766 0 333 2008 186 108 1,703 204 323 105 155 2,783 574 228 271 2 1,199 85 2,358 0 425 2009F 659 108 1,942 231 369 105 155 3,568 497 200 271 2 1,361 105 2,436 0 1,133 2010F 344 108 2,755 326 523 115 214 4,385 497 200 271 2 1,917 144 3,031 0 1,354 2011F 68 108 3,451 406 656 125 333 5,147 497 200 271 2 2,389 180 3,539 0 1,608
Profit and Loss, Rp bn

2007 Revenues % growth COGS Gross profit % growth Joint Operation Gross profit after J.O % growth Operating Expense Operating Profit % growth Other income (charges) Profit before tax Tax Net profit % growth Source: Company and Danareksa Sekuritas 3,218 32 (2,977) 241 35 30 271 22 76 195 26 (64) 131 (38) 93 21 2008 3,934 22 (3,648) 285 18 67 352 30 84 268 37 (89) 179 (57) 122 31 2009F 4,487 14 (4,140) 347 21 67 414 18 94 320 19 (67) 253 (112) 141 16 2010F 6,366 42 (5,833) 533 54 64 597 44 133 463 45 (46) 418 (159) 258 84 2011F 7,976 25 (7,269) 707 33 32 738 24 167 572 23 (49) 523 (215) 308 19
30
7 December 2009
Cash flow, Rp bn
2007 Operating cash flow Net Income Depreciation and amortization Operating cash flow Adjustment to working capital Net operating cash flow Investing cash flow Short term investment Guarantee Long term investment Acq. Fixed assets Net investing cash flow Financing cash flow dividend Receipt (payment) bank loan Add (payment) MTN Advance from project owners Payment finance lease Bonds Equity Net financing cash flow Changes in cash and cash equivalent Beginning balance Ending balance Source: Company and Danareksa Sekuritas 93 7 100 192 292 (1) 6 (10) (2) (8) (41) 153 (50) 23 (6) (247) (168) 116 68 185 2008 122 6 128 (379) (252) (95) 3 (7) (100) (30) 248 128 9 (1) 353 1 185 186 2009F 141 6 147 (130) 17 (6) (6) (33) (77) (28) 600 463 473 186 659 2010F 258 7 265 (467) (202) (59) (17) (76) (38) (38) (316) 659 344 2011F 308 7 315 (401) (86) (119) (17) (136) (54) (54) (276) 344 68
Selected Key Ratios, %

2007 Gross margin after JO Operating margin Net Profit margin ROAE ROAA Net gearing Source: Company and Danareksa Sekuritas 7.5 6.1 2.9 30.2 4.6 72 2008 7.3 6.8 3.1 32.1 5.0 145 2009F 9.2 7.1 3.1 18.1 4.4 3 2010F 9.4 7.3 4.1 20.8 6.5 26 2011F 9.3 7.2 3.9 20.8 6.5 39
31
PT Danareksa Sekuritas Gedung Danareksa Jl. Merdeka Selatan No. 14 Jakarta, INDONESIA Tel : (62-21) 350-9888 Fax : (62 21) 350-1709

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Exhibit 1. PPs business segments

High rise building

Commercial Center Harbor Dam

Building Power Plant

Toll road Offices Hydro Electric Hotel

Exhibit 2. Construction market share

Exhibit 3. Revenues breakdown by type of project

Exhibit 4. Large sized projects from the government & SOE

Exhibit 5. New contracts have grown 20% CAGR in 4 years

Exhibit 6. Past Projects completed

Cable stayed bridge :Batam-Tonton

Pelabuhan Ratu Harbor -Precast-

Dam & Power Plant

Apartment & Mall

Average SBI 1mo

Source: Procon, CEIC, Danareksa Sekuritas

Source: Danareksa Research Institute

Exhibit 9. PPs profits from Joint Operations compared to its peers

Exhibit 10. Assumed total order book for 2009-2014F

Source: Company, Danareksa Sekuritas

Exhibit 11. Revenues from construction

Growth yoy (RHS) 35% 30% 25% 20% 15% 10% 5% 0%

Source: Company, Danareksa Sekuritas

Exhibit 12. Some of PPs mega projects under construction

Operating Profit (LHS)

Operating margin (RHS) 7.6%

Source: Company & Danareksa Sekuritas

* PP based on 7M09 results Source: Companies and Danareksa Sekuritas

Exhibit 16. WACC sensitivity to the value of CFPP

Exhibit 18. PPs operational area

Jawa Bali dan Nusa Tenggara

Divisi Operasi II Cabang III : Jakarta Cabang IV : Jawa Barat

Exhibit 19. PPs construction business operation phases

10.4% 2,288 2,609 3,050 3,694 4,723

12.4% 1,716 1,894 2,122 2,421 2,831

13.4% 1,513 1,652 1,824 2,044 2,332

Source: Danareksa Sekuritas

Exhibit 22. Our DCFs implied FY10 PBV multiple, x

10.4% 1.7 1.9 2.3 2.7 3.5

12.4% 1.3 1.4 1.6 1.8 2.1

13.4% 1.1 1.2 1.3 1.5 1.7

Source: Danareksa Sekuritas

Exhibit 23. Our DCFs implied FY10 PER multiple, x

10.4% 8.9 10.1 11.8 14.3 18.3

12.4% 6.6 7.3 8.2 9.4 11.0

13.4% 5.9 6.4 7.1 7.9 9.0

Source: Danareksa Sekuritas

Exhibit 24. Relative valuation based on domestic construction companies

Exhibit 25. Comparison with Domestic valuation

Source: Bloomberg, price as of 3 December 2009, Danareksa Sekuritas

Exhibit 26. Comparison with regional valuation

Source: Bloomberg, price as of 3 December 2009, Danareksa Sekuritas

Exhibit 27. Weighted average rolling PER, x

Exhibit 28. Weighted average rolling PBV, x

Source: Danareksa Sekuritas and Bloomberg

Source: Danareksa Sekuritas and Bloomberg

Source: Danareksa Sekuritas, Bloomberg

Source: Danareksa Sekuritas, Bloomberg

Construction sector outlook

Vietnam Thailand Singapore Phillipines Malaysia Indonesia -6.0

Exhibit 33. as a result the percentage of construction to GDP is increasing

% of GDP (RHS) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%