With Jokowi now officially elected as the next president of Indonesia, we are more bullish on the prospects for Indonesia’s infrastructure sector. Despite some stern challenges on the macroeconomic front, we are optimistic that the new government will have the resolve to raise subsidized fuel prices in 2015, saving the government money which can be spent in more productive ways. Hence, by pricing in expectations of greater infrastructure spending, we believe that 2015 will be a rosy year for Indonesian state-owned contractors as the direct proxy for accelerated infrastructure development. We roll over our base Target Prices to 2015 based on a target P/E multiple of 21x – at par with 1sd above the sector mean, which is justified during the sector up-cycle. We are OVERWEIGHT on the Indonesian construction sector with WIKA and PTPP as our Top Picks.
Living on expectations
2015 promises to be an exciting year for the Indonesian construction sector, buoyed by hopes of greater infrastructure spending by the new government. In our view, president-elect Jokowi has a solid track record on project execution, and thus assuming the same approach to work, we believe that he will renew his focus on infrastructure development on a nationwide level. In relation to the stern challenge on the fiscal side related to booming fuel subsidies, we expect the new government to raise subsidized fuel prices by 30% in March 2015 at the soonest, saving the government at least Rp60tn. As a result, the new government would have more money to spend in more productive ways, thereby paving the way for the next infrastructure growth cycle.
Bridging the gaps to 2015
Year-to-date, the state-owned contractors have still depended mostly on carry-over projects from 2013 to be booked as earnings since new contracts progress still lags behind management expectations. As a result, until year-end, we maintain our expectation of flattish new contracts in 2014 and mid-teens growth in earnings. Meanwhile, for 2015, we are more bullish and expect a substantial amount of new contracts after 2Q15 contingent on the government raising subsidized fuel prices. We believe that state-owned contractors - as long-term partners of the government - stand to benefit. Hence, we slightly raise our new contracts target for 2015 by 0.4-13.5%, thus resulting in y-y growth of 15.3-27.7%. As a result, we now expect a high double-digits growth in earnings in 2015 as we expect the industry to grow by 29.8% y-y (vs. 5.8% in 2014).
Blue sky scenario: shift to OVERWEIGHT
With the expectation of greater infrastructure spending, we believe that 2015 will be a rosy year for Indonesian state-owned contractors. Hence, we are bullish on all four state-owned contractors under our coverage, despite their considerable outperformance relative to the JCI in 2014. We roll over our base Target Prices to 2015 based on a target P/E multiple of 21x – at par with 1sd above the sector mean, which is justified during the sector up-cycle. All in all, we are OVERWEIGHT on the Indonesian construction sector with WIKA and PTPP as our Top Picks. In our view, share price volatility may continue up to 1Q15 until the new government produces the revised state budget of 2015.
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