Investment Thesis

State-owned Wijaya Karya is Indonesia’s second largest construction firm by market cap, with a diversified portfolio that spans public infrastructure projects such as roads, bridges, airports and seaports, power plants, and industrial plants; as well as residential and commercial buildings such as apartments and hotels. WIKA offers comprehensive exposure to the infrastructure value chain in Indonesia and an attractive way to play its long-term infrastructure growth story. FY16 net sales by segment (excluding JV contributions): Infrastructure and building (mainly civil construction works) 48%; industry (including precast concrete, steel and asphalt production) 21%; energy and industrial plant 18%; and realty and property 13%.

With a diversified portfolio of private construction and public infrastructure projects, WIKA offers attractive exposure to Indonesia’s long term infrastructure growth story. Near term, delays in the Jakarta-Bandung highspeed rail (HSR) project are an ongoing source of volatility for the stock.

New contracts rose 27% YoY supported by strong private sector wins.

Investment Summary

WIKA’s 9M17 new orders rose 27% YoY to IDR31.5 trillion (73% of its IDR43.2t FY17E target), taking its total orderbook to IDR94.4 trillion at end-September (+74% YoY/+13% QoQ) or 91% of its IDR103 trillion FY17E target. Management is targeting +30% YoY net profit growth for 2018, supported by its large orderbook and pipeline of new contracts. 1H17 net profit rose 70% YoY to IDR436b on strong revenue growth (+57% YoY to IDR9.5t) and steady operating margin, while its balance sheet remains strong with 8% net gearing at end-June. We remain positive on the longer term outlook for WIKA.

Over half of WIKA’s 9M17 IDR31.5t new order wins were from the private sector (56%), with the rest from state-owned enterprises (28%) and government contracts (17%). By type of work, the top contributors to new orders were toll roads, roads and bridges (33%, including 11% from the 84km SerangPanimbang toll road in Banten), and building construction (23%). WIKA’s IDR43.2t FY17E new orders target looks achievable despite slow progress on the Jakarta-Bandung high-speed rail (HSR) due to land acquisition delays, and we expect further gradual progress on the HSR in FY18E.

WIKA’s wholly owned high-rise construction unit, Wika Gedung, raised ~IDR830b from the sale of a 30% stake to the public via its IPO this month, which will support further expansion of WIKA’s orderbook. The IPO of another WIKA unit, Wika Realty, is planned for 1Q18. WIKA is also one of several state-owned enterprises planning to issue offshore IDR bonds or ‘komodo bonds’ by 1Q18, according to government officials.

WIKA’s longer term prospects remain positive, supported by its large orderbook (equivalent to more than 3 years of revenue) and a solid record of new-order replenishment.

Stronger than expected order wins and orderbook growth. Margin expansion on increased contribution from higher-margin projects. Acceleration of land acquisition and construction progress on major projects including the Jakarta-Bandung high-speed rail.

Q42017: Indonesia Industrials: Wijaya Karya (WIKA IJ) - Cobalt Capital Inc.

Q42017: Indonesia Industrials: Wijaya Karya (WIKA IJ) - Cobalt Capital Inc.

Q42017: Indonesia Industrials: Wijaya Karya (WIKA IJ) - Cobalt Capital Inc.

Q4 2017: Indonesia Industrials: Wijaya Karya (WIKA IJ) - Cobalt Capital Inc