May 03, 2016 13:19:24
Adhi Karya (ADHI): Soft 1Q16 earnings

1Q was weak as usual; Maintain BUY
ADHI’s 1Q16 result was rather weak, but remained in line with the historical seasonality and continued to be the most volatile among the four listed SOE contractors. We believe that execution will improve in the subsequent quarters, partly driven by its strong 2016 backlog growth of 58% YoY and the slew of project awards with sizeable contract to come from the Light Rail Transit (LRT) in Greater Jakarta. Our TP of IDR3,300 translates to 2016 PE of 17x, in line with the historical discount of 20% to the sector average.

Unexciting 1Q16 earnings on forex and EPC losses
1Q16 earnings growth was tepid at 0.5% YoY to IDR11b, accounting for 1.6% of our full-year forecast, which is in line with the historical seasonality of 1%-5% of 1Q earnings achievement. The unexciting 1Q16 was mainly due to forex loss on the strengthening IDR as ADHI held account receivables in USD. On top of that, ADHI continued to register a loss in its EPC segment, which partially offset its strong 1Q16 construction gross profit growth of 53% YoY with margin expanded to 13.1% vs. 9.2% in 1Q15. Nevertheless, ADHI’s 1Q15 operating performance came largely in line with the historical seasonality.

2H to account for 70% of full year
ADHI’s 1Q16 earnings do not prompt us to revise our full-year target, given that acceleration would typically unfold in the subsequent quarters, particularly towards the end of the year. 2H16 earnings typically account for 70% of full-year target.

Awaiting inclusion of LRT
LRT project inclusion as part of new contracts has not materialised, as the company is still waiting for the official contract with the Ministry of Public Transportation, given the category is a turnkey project. We expect official awards on LRT with maximum value of IDR34t to unfold in 2Q16- 3Q16.