Waskita Karya: Construction

THE COMPANY: Strong national construction growth and the establishment of a new management team in 2008 have been key factors in the success of Waskita Karya (WSKT), the sector’s largest player. In 2012 WSKT aggressively increased its new contracts (excluding job order contracts) to Rp40trn ($4bn), up 40% year-on-year (y-o-y). Among recent big-ticket projects are the Rp524bn ($52m) Krakatau Steel’s land expansion project and the Rp459bn ($46m) Nusa Dua-Ngurah RaiBenoa toll road. These, coupled with a carried-over order book of Rp4.9trn ($490m), leads to the expectation for WSKT to book 2012 top-line growth of 26.8% y-o-y to Rp9.2trn ($920m), the largest construction revenue relative to its peers. Going forward, WSKT will maintain this strong top-line growth momentum into 2014, reaching Rp14.6trn ($1.46bn) (+27% y-o-y), benefitting from the government’s efforts to pump-prime the economy for the 2013-14 elections. This will be facilitated by the recent passing of the land acquisition law.

A steady stream of new contracts has swelled WSKT’s construction order book to an all-time high, propelling 2012-14 net profit compound annual growth rate (CAGR) to 45%, the fastest in the sector. WSKT has been expanding into engineering, procurement and construction (EPC) contracts, which continue to drive up the company’s margin while creating a barrier to entry for its competitors due to the high base capital, technology and expertise required. WSKT’s management targets EPC to reach 2.4% of total 2012 construction services revenue, before rising to 5-7% in 2013-14.

For concrete, WSKT Beton’s higher gross margin of 12% (construction: 9%) will provide overall support for the company’s future margins. Margin support will also stem from property and investment, which will contribute recurring incomes, thereby raising net margin to 3.6% in 2014. WSKT’s current property expansion includes the mixed-used development consisting of office buildings, apartments and commercial area on 1.1 ha of land in Cawang, East Jakarta. The management team members’ average 24 years of industry experience should ensure earnings through improved cost reduction and operating efficiency.

Testimony to this was WSKT’s ratio of operating costs to revenue, which dropped from 5% in 2008 to 3.3% in 2011 and further still to 2.7% in 2012. With this falling ratio and the strategic creation of a competitive cost structure, WSKT improved its net margin from 1% in 2008 to 2.3% in 2012. Additionally, WSKT’s level of competitiveness has continued to grow with a higher proportion of winning tenders, from 12.9% in 2007 to around 20% in 2012 – in the process completing around 950 projects – of which approximately 50% came from the Ministry of Public Works. This proven track record will mean sustainable growth for WSKT, ensuring the recent initial public offering (IPO) proceeds support further expansion through future projects.

DEVELOPMENT STRATEGY: Going forward, WSKT plans to increase its projects and explore new markets, such as EPC. This will help the company to capture a larger market share, in line with WSKT’s growth strategy to expand while diversifying its business to account for lower seasonal earnings. The growth into concrete products, realty and other investments will provide greater margins across the board. Higher working capital will enable the company to provide improved services to its clients. WSKT is also planning to repay part of its maturing short-term loans.

FORECAST: Raised interest charges shouldered by the company are eroding bottom-line growth. Starting in 2013, debt repayment stemming from the IPO proceeds will reduce interest costs, putting WSKT in a net cash position. In 2013 WSKT will have greater flexibility to increase its projects without risk to its financial position by having to borrow more, which in turn will provide the company with greater bottom-line growth. Strong domestic infrastructure projects coupled with boosted building capacity should allow WSKT to be re-rated closer to the sector’s 12-month forward valuation of 17x price/earnings ratio, thereby allowing continued outperformance of the market.