Indonesia Infrastructure: The return of the orders
We upgrade our Indonesia Infrastructure sector outlook to OVERWEIGHT (previously Neutral) given three clear catalysts in 2021-22E: 1) solid economic recovery with GDP growth of 4-6% in 2021-22E from negative territory this year, translating into improving demand/volume and infra project orders; 2) mandated sovereign wealth fund (SWF) to help reduce balance sheet risk and lower capex burden, as well as cash flows; and 3) potential improvement in profitability, thus ROEs, given better operating leverage and continued low funding costs. We are now positive on the three infra sub-sectors, with the pecking order of Indonesia toll road>Indonesia contractors>Indonesia cement. Our preferred stock picks are JSMR, WSKT, and INTP in each sub-sector, given they are the best proxy to potential earnings recovery and stronger balance sheet.
Indonesia toll road & contractors: the return of volume/orders & support from SWF. We expect robust earnings recovery in 2021-22E for both toll road operators and contractors given the potential support from SWF, continued low interest rate environment, and improving operating leverage post COVID-19 crisis. For SWF, the government plans to inject USD5bn of initial capital, excluding the amount of capital invested by foreign investors (govt aims to raise more than USD15bn from investors in the longer term) – we believe toll road projects will be the key priority for the SWF initial fund target, thus JSMR and WSKT will be the direct beneficiaries as the fund will lead to potential balance sheet deleveraging and support cash flows. Furthermore, we believe Indonesia contractors will likely see a robust recovery in new order growth in the next two years, albeit from a very low base in 2020, supported by continued government focus on increasing infra spending and better execution – in all, we forecast aggregate new orders for SOE contractors under our coverage to record a CAGR of 34.1% in 2020E-22E versus declining trend in 2019-20.
Indonesia cement: imminent volume recovery, but competition from tier-2 players may reappear. We believe the sector will enjoy a decent volume recovery of around 3-5% y-y next year driven by improving bulk demand, as well as recovery in retail bag demand. We also believe that costs will likely remain manageable in 2021E, albeit recent recovery in thermal coal prices, given continued strong IDR and low funding costs. That said, we think competition from tier-2 players may reappear given potential higher utilization rate and their focus on market share recovery, especially for the second-tier brands in Java area. Regardless, we believe cement incumbents will likely be able to maintain their profitability given their market dominance in the main brands, thus their earnings should see continued growth.
Upgrade sector to OVERWEIGHT; stock picks in pecking order: JSMR, WSKT, and INTP. We believe investors will focus on the potential earnings recovery next year, thus we prefer JSMR over WSKT and other contractors given better earnings visibility and lesser capex burden in the next five-years. We expect JSMR to record 54%/16% EBITDA growth in 2021E/22E driven by improving volume and tariff hike. Although Indo contractors’ earnings will likely see slower recovery in 2021E given the spill-over effect from deep decline in 2020 orders, we think WSKT will experience the largest B/S risk reduction given its high toll-road project exposure – we estimate WSKT to record a 183%/116% EPS growth in 2021E/22E driven by improving orders and lesser interest charges. We also continue to like cement sector given its proxy to economic recovery, and prefer INTP as our top pick in the cement sector given its stronger B/S profile and it being a direct beneficiary of V-shaped volume recovery in Java – we expect INTP to record 13% EBITDA growth by 2022E. Upgrade sector to OVERWEIGHT.