Mandiri Sekuritas FOCUS (30-Jun-2009) - WIKA: Tax changes: Added hurdle

During our last meeting, the company mentioned that it has bid several projects worth Rp10tn that are being tendered and is waiting for the outcome. This is aside from projects which they have obtained. The tender process, however, is running slightly slower than usual. Note that around 80% from the total are government-related projects. Despite that, its achievement so far is well within its target and also in line with our estimates. Also the previously delayed projects have now resumed. With the prospects of new contracts awarded and resumption of delayed projects, we maintain our Buy call with a price target of Rp400/share, which reflects PER09F of 13.7x (around 10% discount to average regional peers).!

YTD new projects worth Rp3.8tn. Despite the rather slower process on the project owners in naming the winners of the tenders, WIKA has obtained new projects worth Rp3.3tn, equivalent to 35.6% of its FY09F target of Rp9.4tn up to May. An additional Rp455bn DPPU Kuala Namu project has also been monetized in June. Aside from the secured projects, WIKA has also submitted several bids worth around Rp10tn in total.

Changes in tax regulation… Changes on the PP No.51/2008 regarding taxation for construction companies have been made after the government issued PP No.40/2009. Major amendments are 1) final tax of 3% of revenues will only be subjected to projects signed after 1 August 2008 from previously 1 January 2008 and 2) 30% income tax will be maintained for projects executed before December 31, 2008, while the 3% final tax wil l apply for projects whose execution periods extended beyond December 31, 2008 even if the contracts were made before August 31, 2008.

…and the impacts. In our view, the tax change will remove risks of unpaid tax from 2008 fiscal year in the future, as WIKA has factored in the new tax regulation in computing its FY08 financial statement. On the other hand, margin erosion could occur if the contracts prices (made before 1 August 2008 which are to be completed post 2008) cannot be adjusted if cost of materials, etc increase. Assuming 20% of the 2008 carryover projects of Rp5.3tn is multi-years, there may be an additional tax of around Rp21bn (Rp5.3tn x 20% x 2%) in the future. That said, we still apply a 10% discount to average regional peers of 15.3x to obtain WIKA’s fair price.!