Feb 19, 2016 08:34:38
ADHI: Bigger Than Expected

Maintain BUY but raise TP to IDR3,430 (from IDR2,740, 27% upside) on 18x target P/E. Based on channel checks, Adhi Karya booked >IDR460bn net profit in FY15, 10.6%/13.3% higher than our/consensus estimates, while revenue rose to >IDR12trn. We continue to like the firm for its higher LRT project value, potential strong FY15 results and earnings visibility on the LRT project. It is also the cheapest state-owned contractor in the market.

¨ Light rail transit (LRT) project bigger than expected. Adhi Karya’s initial LRT project value was estimated at IDR23.8trn last year but after further discussion with the Transportation Ministry, this value could go up to IDR34trn. The company said the final value is slated for announcement in March. By comparison, Adhi Karya only booked IDR13.9trn in new contracts last year. The LRT project has less land clearing risks vis-à-vis other infrastructure projects, as its train tracks are to use the sides of Jasa Marga’s existing toll roads. The company is also targeting for IDR25.1trn in new contracts (+80.6% YoY) this year, and this number excludes the IDR34trn for the LRT project. Therefore, total new contract wins could hit up to IDR59trn (vs our new estimates of IDR51.5trn), which is 324.5% higher than 2015’s IDR13.9trn. With this huge number in new contract wins and less land clearing risks, we see better earnings visibility for Adhi Karya.

¨ Aggressive guidance and better earnings visibility. Based on our channel checks, Adhi Karya’s FY15 net profit reached >IDR460bn while revenue grew to >IDR12trn, ie higher than our IDR416bn and IDR10trn estimates respectively. Furthermore, we expect its FY16 earnings to rise to IDR666bn while revenue grows to IDR16.8trn. Note that we are conservative with our forecast, given that Adhi Karya guided for net PAT and revenue of IDR750bn and IDR20trn respectively for this period.

¨ Gross margins expansion on higher precast contributions. Adhi Karya is likely to benefit from higher precast contributions to revenue due to the LRT project. This is as the project is likely to require >50% of precast for the civil works portion. We are of the view that Adhi Karya would experience gross margins expansion, given that precast gross margins are higher than those of its construction services business. Precast’s gross margins are around 15-18% higher when compared to construction services, which is normally ~10% only.

¨ Upgrade our TP to IDR3,430. Maintain BUY with a IDR3,430 TP (from IDR2,740) derived from 18x target P/E (+1SD from Adhi’ Karya’s 4-year average rolling forward P/E) on its FY16F revised earnings. The stock is currently trading at 14.1x FY16F P/E, below the sector average of 21x (Figure 2). This counter is also the cheapest state-owned contractor in the market with attractive growth and clearer earnings visibility due to the LRT project.