Construction Sector Update - Neutral
Positive Growth Amid New Contracts Limited to FY18
The construction sector continues as a ‘locomotive’ of economic growth, surging above the National GDP in FY18, with a level of 6.09% YoY (vs 6.79% YoY in FY17). We see that new contract disbursement which only reached 81.87% of companies target in FY18, became an indicator for weakening condition. A decline in the value of new contracts was the result of: 1) Delay of several large projects (e.g. 15,000 MW power plant project); 2) A rising leverage levels with debt-to-equity ratio (DER) of construction companies by 1.28x in FY18 (vs 1.13x in FY17).
Construction Sector Scenario in Future Governments
Bull Scenario: According to Jokowi-Ma'ruf Vision and Mission “Indonesia Maju” (at point 3) explicitly, incumbent will continue his equality development through decentralization program, infrastructure development and fostering local industries. It is expected that sustainable infrastructure development will continue to be carried out in order to support National Strategic Projects. In addition, Jokowi has allotted IDR415 trillion for infrastructure in the 2019 State Budget, for an increase of 1.04% YoY (vs IDR410.7 trillion in FY18).
Bear Scenario: In the first point of Vision-Mission, the government will focus on the development of human quality and industry 4.0, as shown in the 2019 State Budget, by raising education and health budgets at 10.90% YoY. This reflects a transition from a phase of ‘hard infrastructure’ to ‘soft infrastructure’.
Geopolitical Instability Potentially Suppresses the Rate of Infrastructure Development
The so-called ‘Trade War’ between the United States, Europe and China, echoing global economic instability, will exert a significant impact on emerging market countries, such as Indonesia. The most significant one was volatility in world oil prices, rising by 41.77% YoY to USD73.25/bbl in 9M18, then swooning by -24.84% YoY to USD45.41/bbl for FY18. On the other hand, even though the Fed is displaying a dovish tendency in FY19E, this does not rule out a possible increase in FFR, which in FY18 popped up 100bps to 2.50%. This could potentially exert an impact on: 1) Volatility in world oil prices, disrupting fuel subsidies and infrastructure budgets in FY19E; 2) Depreciation of the Rupiah, with the potential of spiking construction costs; 3) Increase in 7-DRR has the potential to spike cost of funds for companies.
NEUTRAL Recommendations with Selected Stock: PTPP and WIKA
We consider that the construction sector's growth is relatively limited to FY19E to 1H20F, due to several things, including: 1) Consolidation and the focus of government for the new 2019-2024 period will be seen in 10M19; 2) Geopolitical condition potentially affect the Indonesian macro economy focus, thus giving an impact on the improvement of national infrastructure development. We maintain NEUTRAL ratings for the construction sector, with selected shares of PTPP (HOLD TP Rp.2,490) and WIKA (HOLD TP Rp.2,220).
Disclaimer On
MNCS Institutional Research Team
