CLSA Wijaya Karya (WIKA IJ), Indonesia’s largest construction company

Hadi looks at Wijaya Karya (WIKA IJ), Indonesia’s largest construction company. He maintain the BUY rec and TP Rp400.

The whole construction sector is miniscule, with total market cap of only US$269mn. Even WIKA, the biggest one in the sector, has a market cap of only US$150mn. This one is only for the super-duper patient investors.

A big obstacle to overcome in this sector is that margins are so tiny (net profit of 2-3%) that any error/uncollectible receivables or changes in govt policy will dramatically affect the profitability. Plus industry is super competitive with thousands of active construction companies.

For example, the new 3% fixed rate tax formula for construction service introduced mid last year (applied retroactively) lacked socialisation really hurt profits. For the first 2 years of new tax formula implementation, contractors were the ones paying the expenses because the contracts had already been signed.

Key points from the report:
Rising market share in the still growing market. Expect market share to go up from 6.6% to 8% in 2010.
Expect national construction spending to recover in 2010 reaching Rp110tn or 5% CAGR 2008-10.
Infrastructure spending will be the main growth driver and we expect the property sector to recover in 2010.
WIKA has sufficient order book. It has secured Rp11.3tn order book of which Rp5.1tn will be converted as 2009 revenues] or 71% of our FY forecast.
Valuation: attractive at 6.6x PE10CL. Our TP of Rp400 is based on 10x PE10CL.