Sectoral Recommendation: Construction & infrastructure prospective

This article has been translated by PwC Indonesia as part of our Indonesia Infrastructure News Service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.

Bisnis Indonesia - Rekomendasi Sektoral: Konstruksi & Infrastruktur Prospektif

25 May 2019

By: Dwi Nicken Tari

Bisnis, Jakarta — A number of analysts are optimistic that the construction and infrastructure sectors grow stronger in the second period of President Joko Widodo’s tenure.

Analyst of Kresna Sekuritas Andreas Kristo Saragih said that he was optimistic about the construction sector’s prospect for the next 5 years under Jokowi administration.

“We see opportunities such as the construction of Trans-South Java toll road, construction of a number of toll roads in Kalimantan and Sulawesi, construction of Jakarta-Surabaya train, and the capital city relocation to Kalimantan,” said Andreas when contacted by Bisnis, Friday (24/5).

Besides that, Andreas added, the construction and infrastructure sector would also benefit from the formation of a construction holding later.

Based on data from the Ministry of State-Owned Enterprises (BUMN), currently there are six state-owned sectoral holdings, which are Oil and Gas Holding, Mining Holding, Plantation Holding, Forestry Holding, Cement Holding, and Manure Holding.

The establishment of several new holdings are also in the middle of arrangements by the government, such as infrastructure holding and housing and regional development housing which is currently in the finalisation process.

This said, Andres reminded that challenges for the construction and infrastructure sectors would be related to the high debt position (gearing) and payment schemes.

“Gearing means that the current debt position is already quite high. So the issuance of new debt securities is limited. Meanwhile for the payment schemes, it is [to decide] whether to utilise Contractor Pre Finance (CPF) or turnkey, modified turnkey, or other schemes,” Andreas added.

For recommended stocks, Andreas appointed WSKT and WIKA as favourites. He assessed, WSKT would be supported by the toll road divestment plan that would be realised this year with an inviting price and a price-to-book value (PBV) of more than 2 times.

For WIKA, the development of the high-speed railway project would support the company’s performance this year.

In line with that, Bahana Sekuritas also predicted that the infrastructure sector which would be the government’s focus for the next 5 years would remain attractive. Because the order book of construction companies could later be maintained or even improved. This said, there were still a number of things to be cautious about.

Head of Research of Bahana Sekuritas Lucky Ariesandy said one of the stand-out programs of President Joko Widodo in his second term was the continuation of infrastructure construction.

For information, Bappenas will shell out US$412 billion on infrastructure in the second term of President Jokowi administration, double of last year’s infrastructure expenditure worth US$200 billion.

Even though that is believed to benefit contractor companies in terms of order book, Lucky reminded that contractor companies already had higher net gearing ratio. A gearing ratio is a finance ratio that compares a company’s equity against its loan.

High Gearing

Based on data arranged by Bahana Sekuritas, the average leverage of construction companies increased to 83.5% in 2018 compared to 33.8% in 2014.

“There are indeed some [contractors] with a net cash like Wijaya Karya. But some other contractors started with a quite high gearing ratio,” said Lucky in Jakarta, Thursday (23/5).

That will give construction companies different abilities to receive additional orders of infrastructure projects from the government later.

Besides that, the infrastructure construction is also predicted to affect banks’ Loan to Deposit Ratio (LDR) system.

Lucky stated, the first stage of infrastructure construction was very much funded by state-owned banks, prompting the LDR in the banking system to rise to 94% from 89% in the last 5 years.

“If observed, SOEs are now among the biggest borrowers in Indonesia. The portion of the total loan has increased significantly in the last five years,” Lucky said.

Furthermore, infrastructure projects also has a longer payback period compared to bank loans for the construction of private company’s plants. This is predicted to worsen the LDR of the banking system.

“When funding private sector’s plant construction, in 2 to 3 years the money will start to return to the bank. For infrastructures, maybe the payback can be longer than that,” Lucky said.

Also, it should be noted that the increase in imports related to infrastructure projects is feared to exacerbate Indonesia’s trade deficit which will eventually worsen the current account deficit.

Analyst of JPMorgan Sekuritas Indonesia Indra Cahya and Karen Li added  with the affirmation from the government to continue infrastructure construction in the next five years, a few issuers such as WIKA, ADHI, and PTPP would receive an order book of around 17% to 18% yoy (year-on-year) this year, while WSKT’s order book would increase by 1% yoy.

“Our calculation shows WIKA and WSKT having lower concentrated risks compared to ADHI and PTPP by March,” Indra and Karen wrote in their latest research.

WSKT has the highest customer concentration compared to their peers. Toll road infrastructure (with Jasa Marga and Hutama Karya) becomes one of WSKT main income sources. Meanwhile, ADHI is assessed to have the lowest income concentration compared to the four other construction companies.


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