Indonesia Pondasi Raya: King Of The Underground
We initiate coverage on Indopora with a BUY call and IDR2,360 TP (53% upside) based on 15x FY17F P/E. This is at a c.14% discount to the construction sector’s current weighted average P/E, and supported by our DCF valuation of IDR3,133. We expect the company’s earnings to grow following a revival in property demand due to the economic recovery and Government’s support. We also like Indopora for its healthy balance sheet and comprehensive range of machineries, which allows the company to gain market share in the foundation business.
¨ High margin contractor. Indonesia Pondasi Raya Tbk PT (Indopora) benefits from high gross and net profit margins, which stood at 29% and 20% in FY15 respectively vs competitors’ 9-18% and 9%. This is because the foundation business has higher average GPMs of 25-30%. Indopora’s focus on foundation works also enables it to raise its prices, which is possible due to high quality requirements for such works and its smaller value, at only 20% of total construction costs. Supported by the diversified range of its fleet, Indopora is able to take on specific projects and minimise the need for sub-contractors. Such projects usually provide higher margins, while sub-contractor costs are usually kept at <10% of its revenue.
¨ Robust growth in FY17F and strong balance sheet. We expect Indopora’s earnings to grow by 24.9% in FY17. This is on the back of an improving property outlook and IDR1.3trn/IDR2trn in new contract targets for FY16-17 respectively. The company has successfully maintained positive operating cash flows and we expect this trend to continue in the coming years. Indopora also maintains a healthy balance sheet with declining gearing levels, averaging at 0.27x during the 2012-2015 period. Its net gearing stood at -0.22 in FY15, which indicates a net cash position of IDR220bn. With conservative debt management and a cash-generating business, we expect the company to maintain its low gearing and net cash position going forward.
¨ Beneficiary of a potential recovery in property demand. The Government is encouraging commercial banks to lower rates to single digits by the end of 2016. It also recently passed a tax amnesty bill. Both policies will likely stimulate demand in the property sector, in our view. As Indopora focuses on high-rise building construction, we see the more favourable property market outlook next year as a growth catalyst.
¨ Risks to our call include:
i. The current soft demand in the property market;
ii. Competition in the foundation and precast works segments.
¨ Initiate coverage on Indopora with a BUY and IDR2,360 TP based on 15x FY17F P/E, and backed by our DCF valuation of IDR3,133 (TG: 2%, WACC: 10%, and RF: 8 %). (Dony Gunawan, Kristine Putri)