Bleak outlook
Downgrade to SELL, TP lowered to Rp129
We slash our FY09-10E EPS estimates by 83.6-85.6% on the unfavorable new tax system for construction businesses. Our TP is reduced to Rp129 from Rp220 previously. As such, we change our recommendation from a Hold to a SELL. The outlook for the company’s business is rather bleak up to 2010 given the economic slowdown which will have an adverse impact on the construction business (and especially on private construction projects, TOTL’s area of expertise). Our TP implies PE09-10F of 18.8-19.0x and PBV09-10F of 0.76-0.74x.
Revenues forecasts cut by 10.8%-22.2% for 09-10F
We lower our revenues forecasts by 10.8%-22.2% for 09-10F due to the company’s large exposure to private projects. We believe that these projects are more likely to be “put on hold” because of the slowing economy and also because of the increasing uncertainties ahead of the presidential elections on 8 July (with a possible run-off on 8 September, if needed). There is also evidence of lower occupancy rates in available retail areas and lower take-up rates for apartment sales. This indicates a condition of oversupply at the current time. In addition, the building permits index for Feb 09 also fell. As such, we remain cautious in regard to the prospects for the company’s revenues growth going forward.
No fiscal stimulus after all
The new 3% final income tax on revenues is also depressing. This new tax came into effect in July 08 and was imposed retrospectively starting Jan 08. However, the construction companies have only agreed to apply this new tax to contracts signed in Aug 08 onwards. As can be seen in the 2008 financial results, the new tax has a negative impact on construction companies. This is because the effective tax rate is pushed up to 32-67% from 21-30%, thus squeezing the already slim margins of construction firms from 6%-7.6% previously to 0.9%-4.5%. Going forward, we see little respite despite easing material cost pressures and expect TOTL FY09-10F margins of 0.95%-0.90%.
Prudent cash management is crucial
We believe the cost of funds for construction companies remains high since banking NPLs from the construction sector still increased by 73% yoy in Feb 09 despite falling interest rates. Fortunately for TOTL, it has become cash rich by adopting a prudent cash management strategy (it has a cash position of Rp289.6bn at the end of 2008). Through its prudent cash management, the company has been able to shorten the receivables collection days by 40% to 30 days from around 50 days previously. Under our sensitivity analysis, the 2010F cash balance will decline 59% if the receivables collection days are late by 10 days. If they are 20 days late, we expect that additional external financing will be needed.
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