Nov 28, 2016 12:17:19

Adhi Karya ($ADHI): The Train is Not Here Yet

Downgrade to NEUTRAL with a lower TP of IDR2,085 (from IDR3,150) as the LRT Greater Jakarta Phase 1 contract may likely be signed latest in Mar 2017, and to reflect the bigger-than-expected loss in the EPC project. Thus, we adjust our orderbook assumption and trim FY16F-17F earnings to IDR266bn and IDR492bn respectively, as we expect lower projections from the company. Management announced a conservative earnings guidance of IDR500bn for FY17, as there may be a potential further loss in EPC projects next year.

¨ Update on LRT Greater Jakarta. Adhi Karya expects to sign the IDR23trn LRT Greater Jakarta Phase 1 contract at the latest in Mar 2017, which is later than our expectation of Dec 2016. It submitted the proposal to the Ministry of Transportation in October and is currently in discussions over the payment scheme of the projects. The company also expects to incur a minimum gross margin of 10% from the projects.

¨ The Government plans to finance this project using the state budget and a bank loan in FY17-19. Adhi Karya expects the Government to allocate IDR10trn for the project. Thus, during construction, it would have to borrow up to IDR13trn from the bank – which would be reflected in its balance sheet. Furthermore, the company would bear the interest cost during the construction stage. After the project is completed, the loan will be passed to the Government (including interest expense).

¨ Loss in EPC projects. Management expects its EPC unit to incur a gross loss of IDR400bn this year, vs our initial estimate of IDR300bn. Hence, we adjust our loss estimate to IDR414bn for this year. In FY17, we also expect this unit to book a potential loss of c.IDR214bn as there may be a loss stemming from the potential cancellation of a power plant project.

¨ Orderbook. We expect new contracts won to hit IDR16trn by the end of this year – which is below the company’s guidance of IDR18trn – as we see that its current level of orders is still relatively slower than the seasonal norm. We pare down our new contracts assumption for FY17 to a conservative IDR18trn (ex-LRT Greater Jakarta Phase 1, which is worth IDR23trn). Up to the third week of November, Adhi Karya’s new contracts reached 71.3% of our full-year estimate.

¨ Cutting our earnings estimates. We cut our FY16F earnings to IDR266bn this year as the delay on the LRT Greater Jakarta contract signing and loss in the EPC division may hurt the company. Conservatively, management guided FY17F’s NPAT to be IDR500bn, lower than our initial estimate of IDR688trn. As such, we cut our FY17F earnings to IDR492trn.

¨ Downgrade to NEUTRAL. Our new TP of IDR2,085 (from IDR3,150, 7% upside) is derived from 15.1x FY16F P/E, its 5-year historical forward P/E mean. (Dony Gunawan)