Mar 01, 2016 15:33:58
Adhi Karya ($ADHI) - Do Not Miss The Train!

We continue to like Adhi Karya on a potentially huge FY16 orderbook and the LRT project, which ought to give it better earnings visibility up to FY18. Moreover, precast needed to support the LRT project is likely to lead to higher gross margins. Maintain BUY with a IDR3,400 TP (from IDR3,430, 29% upside, which implies 18-14x FY16F-17F P/Es respectively.

¨ Giant orderbook since Adhi Karya has IDR11.5trn (+41.2% YoY) in carryover contracts for FY16 (FY15: IDR8.1trn). It is also expecting to land IDR41.5trn (+197.1% YoY) in new contracts in FY16. Given that huge estimated orderbook, we opine for a higher earnings visibility ahead for the contractor.

¨ Light rail transit (LRT) project. We see the LRT project as improving Adhi Karya’s earnings visibility due to its huge value, which would last until 2019. The firm’s gross margins would likely improve also on higher contributions from its precast business, which is needed to build this project. Regarding the recent issue on its request to become the LRT’s operator, we see a potential negative impact on its operating cash flow. However, the LRT possess more benefits by having subsidised ticket fares from the Government. In conclusion, we favour the LRT over transportation projects like the High-Speed Rail (HSR). In the case of the HSR, this is because there is no financial support for it from the Government, the construction cost per km is higher and there is more daily traffic from the LRT vs the HSR. The key downside risks are a delay in LRT project and lower-than-expected new contracts obtained for this year would impact profitability.

4Q15 earnings: in line

¨ Maintain BUY with a IDR3,400 TP (from IDR3,430). Post our FY16F NPAT adjustment, we maintain our BUY call with a TP of IDR3,400 which is based on an unchanged 18x FY16F P/E, +1SD from Adhi Karya’s 4-year mean. This stock is also the cheapest state-owned contractor in the market, with attractive growth and clearer earnings visibility due to the LRT project.