Indopremier PTPP Superior Profitability and RoE

PTPP profitability has soared gradually during 2005-2009 and recorded superior profitability in 2008-2009, thanks to its cost efficiency program. Meanwhile, improving cash collection capability and the additional of authorized capital has resulted in abundant cash and lowered leverage ratio during the same periods. Currently, the stock is traded at 10.09x-3.22x PE-PBV FY11F which is still attractive and eligible to conducted premium valuation, given its superior profitability and RoE. Hence, we initiate PTPP coverage on BUY rating with fair value at Rp 1,000 per share based on DCF-methods.

A long journey
Established under the name of NV Pembangunan Perumahan in 1953, which was intended to build houses for the functionaries of PT Semen Gresik (Persero) Tbk, a BAPINDO’s subsidiary. On its development, PTPP is engaged in two business activities, i.e.: construction services and strategic investments. Currently, PTPP was the third largest state-owned construction company in Indonesia which controls 3.7% market share.

An added value: Go Green concept
PTPP is the first pioneers in Indonesia construction service who has an initiative to develop the concept of “Go Green” in its several construction projects which could recycle water usage and saving energy consumption. The contribution of PTPP “Go Green” project is still relative small to the total revenue. We believe that the company will be benefited by its "Go Green" initiative due to the Green concept will become more popular in the future, in order to reducing the effect of global warming.

Recorded superior profitability
PTPP’s profitability has increased gradually during 2005-2009, supported by the success of management in implementing the policy of cost efficiency. The ratios of cost/total revenue have been maintained well and relative tend to decline, thus resulted in superior profitability in 2008 and 2009 which were higher compared to the industry. Meanwhile, the company’s efficiency program has bringing in superior profitability in 1H10 which was compared to 1H09 periods, but the figures was below the industry due to the delayed projects and higher opex/revenue ratio.

Better cash collection, better liquidity ratio
PTPP managed to generate more cash hence enhancing liquidity. The balance of cash and cash equivalent has surged significantly by 109% p.a. CAGR from Rp 23 billion in 2005 became Rp 446 billion in 2009, thanks to better cash collection capability. The company receivable turnover has become better and achieved its best level in 2009. Moreover, leverage ratio is also getting better, which was also supported by an equity increase and the additional of PTPP authorized capital. Meanwhile, the IPO proceeds have filled PTPP’s pockets with abundant cash in 1H10. The issuance of 1.04 billion new shares at Rp 560 per share has generated cash proceeds of Rp 566.06 billion which will be utilized to finance working capital (41%) and investment in construction project (59%).

Financial Forecast in brief
Learned from the global financial crisis and to mitigate the risk of defaulted project payment, PTPP is still going to be focus on government projects for the year 2010-2011 which will contribute 80% to the company’s project portfolio. Underpinned by lower interest rate, an enthusiastic property sector, the continuation of infrastructure’s investments as well as the realization of delayed government spending, we forecast that the company’s revenue and net profit will grow by 55.0% YoY-30.3% YoY and 84.1% YoY-29.3% YoY in FY10-FY11, respectively. Meanwhile, PTPP profitability are projected well-maintained backed by the company’s cost efficiency.

Initiating coverage with BUY rating
By using 11.84% WACC assumption, 2011 as basic year and 3% terminal growth in DCF-method calculation, we obtained PTPP’s fair value at Rp 1,000 per share. Currently, the share price is traded at 10.09x-3.22x PE-PBV FY11F. We view that the counter is remain attractive and eligible conducted premium valuation, on the back of superior in profitability and RoE. Hence, we initiate PTPP coverage with BUY rating since our fair value offers 23% upside potential.