Mandiri Sekuritas ADHI: Illness in remission

Its 2 major projects eluded ADHI’s performance in 2 consecutive years, namely the Jakarta Monorel and Al-Habtoor, Qatar. Yet in 2009, ADHI‘s performance was above analysts’ expectation as well as internal target (as net profit more than doubled), despite the Rp113bn provision made for the Al-Habtoor project. This shows its ability to i! mprove th eir profitability to offset provisioning. For 2010, ADHI targeted new projects to reach Rp9tn (or 28% yoy), which in line with our projection. To be conservative, we apply another Rp150bn provision for the Al-Habtoor projects in 2010 and 2011. Nevertheless, ADHI’s valuation is still attractive, with low-single digit PER10F of 5.9x. Thus, we maintain our Buy recommendation with higher price target of Rp800/share. Our target price reflects PER10F of 8.2x.

Focus on operational efficiency. In 2009, ADHI’s operating margin increased to some 7% from 5.5% in 2008. They are focusing into operating efficiency oriented from previously growth oriented. Yet, net margin of 2.1% is relatively similar with periods prior to 2008. This is due to impairment some of their receivables from Al-Habtoor (Rp113bn). Without the provision, net margin could have been 3.6%.

Conservative projection. We expect revenue to grow 10.7% yoy in 2010, given higher new project bookings (+25% yoy). This is in line with company’s target. After the Rp113bn provisioning in 2009 for project in Qatar, there is still some Rp307bn remaining in ADHI’s book linked to this project, potentially deductible in the future. We thus apply some Rp150bn provision in FY1F0 and FY11F, to reduce a significant chunk of un! certainty and that leaves ADHI with upside risk should the project owner repay its liabilities.

Maintain Buy with target price of Rp800/share. Given better-than-expected FY09 result, we made a few adjustments in our forecast which resulted in higher revenue (+12.0%), as well as net profit (+75.8%). This resulted in higher target price of Rp800/share from previously Rp540/share. Our target price reflects PER10F of 8.2x, still some 45% discount compared with JCI. This is still very much lower compared with ADHI’s average 3-yr discount to JCI of around 13.9%.