Construction Sector Update - 18 March 2021

CONSTRUCTION SECTOR UPDATE

Like “Bread and Butter”

Relaxation on Income Tax has the Potential to Improve Earnings

•  Recent issues regarding the incentive to reduce the final income tax rate for contractors and consultants will bring a gust of fresher air in the construction business. The government plans to relax the Draft Government Regulation (RPP) Second Amendment to Government Regulation No. 51 of 2008 through Presidential Decree No.4 of 2021 regarding construction business income tax.
•  The government proposes to reduce three of the five types of final income tax rates for construction businesses, which are: 1) Reduction on the final income tax rate to 1.75% (from 2%), for construction services and individual contractors or small businesses; 2) reduction of the final income tax rate to 2.65% (from 3%), for construction services performed by service providers with small business qualifications; 3) reduction of the final income tax rate to 3.5% (from 4%) for qualified construction consultants. Meanwhile, the same income tax rates still applies for other qualifications in the construction sector, at the level of 4% and 6%. We consider that the plan has the potential to provide benefits for SOE contractors. Reduction in final income tax rate to 2.65% will improve earnings with a potential growth of 10%-20% in FY21E-FY22F, and increase margins in the future.

Recycling Asset is still The Main Focus

•  WSKT IJ has divested two assets which are the Semarang-Batang toll road and the Medan-Kualanamu-Tebing Tinggi toll road. WSKT through Waskita Toll Road (WTR) has released  30% stake in the Medan-Kualanamu-Tebing Tinggi toll road, entering into a conditional sale-purchase agreement (CSPA) to Kings Ring Limited (KRL) worth IDR824 billion. While, 20% ownership of the Semarang-Batang Toll Road to Limited Participation Mutual Funds is worth IDR1.5 trillion. The proceeds from the divestment might be generating stronger cashflow by IDR2.8 trillion from the targeted IDR11 trillion in FY21E.
•  JSMR IJ plans to divest 9 toll roads through SWF, around 2-3 assets are planned to be realized in FY21E with a target funds of IDR1.5-3 trillion. Furthermore, divestment towards Pandaan-Malang toll roads (35%) and Medan-Kualanamu-Tebing Tinggi (15%) has been signed by CSPA, a subsidiary of PTPP IJ. However there has been no disclosure nor update of information regarding these plans. In addition, PTPP has succeeded in divesting several assets such as: 1) Cisumdawu Toll Road by 14% worth IDR50.25 billion; 2) Kualatanjung Multipurporse Port by 25% through CSPA worth IDR378 billion.

OVERWEIGHT Recommendation for the Construction Sector

We maintain the OVERWEIGHT outlook for Construction sector in FY21F. We believe SWF sentiment could be a turnaround story for this year. We see opportunities in the long run in line with the government's priorities, although Covid-19 still become a main risk. Moreover, the valuation is relatively low with current PBV stood at -1 to 0 STD PBV (5 years average). Our preferred stocks are ADHI IJ (BUY; TP: IDR1,980), PTPP IJ (BUY; TP: IDR2,600) WSKT IJ (BUY; TP: IDR2,000) , WIKA IJ (BUY; TP: IDR2,400) and JSMR IJ (BUY; TP:IDR5,100).

Disclaimer On

ADHI, PTPP, WSKT, WIKA, JSMR