Total Bangun Persada: Construction

The Company

Total Bangun Persada (TOTL), one of two listed construction companies not owned by the state, focuses on high-rise buildings for residential, office and commercial projects. Established in 1970, the company was listed on the IDX in July 2006, before being included in the MSCI Indonesia Index in May 2013. TOTL has built some prestigious buildings in Indonesia, including Bank Mega Tower, Trans TV, The Regatta Apartment and The Pakubuwono Residences. As of September 2013, the company’s revenues mainly stemmed from projects in Java and Bali (76%), followed by undertakings in Kalimantan and Sumatra (10% and 9%, respectively), with high-rise residential as the largest revenue contributor (27%), followed by shopping centres (23%). Following TOTL’s entry into the property market through the creation of Total Persada Development (TPD), the firm has now established Total Persada Indonesia (TPI), which deals in engineering, procurement and construction (EPC) work, focusing on civil work in industrial building for oil and gas. Currently, TPI is working on Indocorsa, a tyre-making plant, while TPD is finishing the GKM Tower development, a “green” office building in South Jakarta, consisting of 22 floors and three basements with land area of approximately 5000 sq metres, building area of 28,000 sq metres (with 14,900 sq metres for sale). The management expects this development to be completed by March 2014. TPD is also developing a condominium hotel in Tanjung Benoa, Bali, with expected completion in March 2014. Despite this diversification, the construction segment continues to represent the lion’s share (85%) of TOTL’s revenues.

Development Strategy

Even with the slower economic growth expected in 2014, we believe TOTL will still be able to increase new contracts, helped by highquality products and timely product deliveries, which relate to high client satisfaction (repeat orders account for 75% of projects). This would not only allow for additional repeat orders, it also would allow TOTL to continue with current project developments without delays.

Going into 2014, the company’s top line should be supported by revenues from new projects in 2013 (such as Binus Alam Sutera, Menara BRI BSD, Neo Simatupang Hotel). On the cost side, development of higher-end prestigious projects in Bali such as Ramada Sakala Suites & Condotel in Tanjung Benoa, Marriot Hotel in Seminyak and Holiday Inn in Tanjung Benoa, should ensure gross profit margins in excess of 10%. To support its performance growth, TOTL is participating in tenders of office buildings amounting to Rp5trn ($500m) and to be announced in early 2014, high-rise residential Rp50bn ($5m), malls Rp300bn ($30m) and hotels Rp250bn ($25m). Related to the continuing depreciation of the rupiah against the dollar, the management of TOTL has stated that in 2014 the company will implement new contracts and will also create dollar contracts when the project’s construction materials are mostly imported.

Forecast

On the balance sheet front, we believe TOTL’s net cash will not only support the company’s future expansion plans but also provide protection in the event of possible liquidity crunch ahead. Prudent cash management implementation also supports TOTL’s operations. Its direct contract scheme translates into minimal inventory, allowing for lighter working capital requirements. The company only allocates 2014F capex range of Rp20bn-25bn ($2m-2.5m). This will support growth and allow TOTL to book revenue and net profit CAGR of 16.4% and 18.9%, respectively, in 2011A2014F period. On valuation, TOTL trades on 2014 PE of 8.1x, one of the most attractive contractors under our coverage, particularly as recent share price correction provides limited downside from current levels.

The dividend policy is attractive, with a payout ratio of 40% for net profit of between Rp50bn ($5m) and Rp200bn ($20m), and 50% for net earnings above Rp200bn ($20m). At our target price of Rp750 ($0.075), reflecting 50% upside potential, TOTL would still trade at undemanding 2014F PE of 12x, more than 40% discount to the average regional construction peers.