Dec 19, 2016 11:50:43

Waskita Karya ($WSKT) - Key Takeaways From Solo-Ngawi Toll Road Site Visit
We visited the Solo-Ngawi toll road located in Central Java. It forms part of the Trans Java Toll road and is regarded as one of the national top priority projects. Initially, the toll road was expected to be operational in 2018. However, given the smooth land acquisition and construction progress, it aims to open the toll road in Oct 2017. We maintain our BUY recommendation with an unchanged TP of IDR3,750 (51% upside). This is as the faster land clearing process would definitely benefit it since Waskita is the country’s second biggest toll road concession holder.

¨ Solo-Ngawi toll road. The project was initiated back in 2009 with a total length of 90km connecting the cities of Solo and Ngawi city. It was first expected to be operational in 2014. The toll road is divided into three sections. The first 20.9km (Kartasura-Karanganyar) was subsidised by the Government using the state budget. The other two sections (Karanganyar-Mantingan and Mantingan-Ngawi) were constructed by Solo Ngawi Jaya (SNJ),previously owned by Thiess Contractors Indonesia (Thiess). However, due to a land acquisition issue, construction was at a standstill. Hence, Jasa Marga ($JSMR) and Waskita KaryaToll Road (WTR), a subsidiary of Waskita Karya Persero (Waskita), took over the concession from Thiess in FY15.The Government now expects the Solo-Ngawi toll road to be completed in FY18. However, given the aggressive infrastructure development boost by President Joko Widodo, the land acquisition has been expedited as a result of the new land acquisition law. The toll road is likely to be opened during the Eid Al-Fitr holiday in 6M17 and fully operational in October the same year. Construction has now reached 51.56% completion and there are only around 50 land plots left to be cleared.

¨ Toll road to support the growth. With a recent concession signing of the Krian Legun di Bunder toll road, Waskita currently has around 15 toll roads, most of which are in complete toll roads. Having said that, we think that Waskita would have the highest earnings visibility ahead. This is as we expect its total orderbook to likely easily hit around IDR120trn in FY17, which is sufficient for its revenue for the next three years. We also think that its imminent plan to divest WTR to Sarana Multi Infrastruktur (SMI) and national pension fund PT Taspen Persero would alleviate its burden on cash flow and balance sheet.

¨ Diminishing land acquisition risk. Given the new land law in early 2015, we see some progress on infrastructure development in Indonesia. While execution of the bill was lacking in the first six months after its issuance, there has been faster progress from the concession owner and Government in clearing the land area for the projects. We saw this during our site visit to the 2x1,000MW Batang power plant (Lower Execution Risk Underpins Positive Outlook)and Solo-Ngawi toll road. The law stipulates that if there are no counter charges from the land owner within 14 days of the submission of the land value appraisal to the court, an execution order would be issued to start construction over that land.

¨ BUY with TP of IDR3,750. Maintain OVERWEIGHT on the construction sector, with Waskita as our Top Pick. As the biggest toll road contractor in the country, itis slated to be a direct beneficiary of the faster land acquisition process. We maintain our BUY call with a TP of IDR3,750, based on 23x FY17F P/E. (Dony Gunawan)