Our country head, Nick Cashmore once wrote that Bob the Builder will love Indonesia. That is probably true given so much potential for growth in the infra and property space. But execution has been a big issue. As a percentage of GDP, the government infra spending remains at <2%.
Bob the Builder should not give up. In her big note on construction sector today, analyst Sarina highlighted some interesting development in the construction sector. Let’s start with government’s budget: infra spending budget is raised by 28% to Rp121tn (US$13.5bn) in 2011. The government is also working on better regulatory framework such as the anticipated land clearing law. Other good recent developments include the potential tax holiday incentive, BKPM to offer PPP projects, and the plan to re-tender stalled 24 toll road projects.
Sector valuation is still looking attractive at 8.8x 2011 PER and 10.4x 2012PER. Sarina’s top pick in the sector is Wijaya Karya (WIKA IJ). The company is winning new contracts and has been able to expand operational margin in the past few years. WIKA also has stronger balance sheet and the stock is more liquid compared to its peers.
Another way to play the construction theme is through cement sector. We like Holcim Indonesia (SMCB IJ) in particular. Assuming the company selling 100% of the output to domestic market, SMCB is still trading at 9.8x 2011PER and 8.4x 2012PER.
Other key points from the report:
More government budget for infra but still need private sector. Government increased infra spending budget by 28% to Rp121tn (US$13.5bn) in 2011. However, spending remains below 2% to GDP. Private sector led more infra development at cagr of 46% vs gov spending at 24%. Private sector participation is badly needed.
Better regulatory framework such as the anticipated land clearing law is a key to success.
Other good recent developments include the potential tax holiday incentive, BKPM to offer PPP projects, and the plan to re-tender stalled 24 toll road projects
Plenty of opportunities for construction. Construction revenue and profit has grown at a cagr of 24% and 16% respectively. Construction credit also grew at 24% cagr, albeit still a small 4% of total bank loan.
Total new contract this year is expected to increase 44%.
Fierce competition, but diversification is the key. The winners are those that are able to diversify their portfolio of projects, have the ability to manage costs and receivables, and have strong balance sheet to support growth such as investing in assets that can bring construction job and recurring income.
Valuation is attractive, but low liquidity is a concern. The sector is trading at an ave. 8.8x cons. PE11 and 7.5x PE12. We think this is attractive, however ave. daily turnover of US$0.9m is a concern to most investors. Top pick: WIKA.
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