• Keep BUY, new IDR1,100 TP from IDR1,400, 17% upside, which implies 9.7x FY22F EV/EBITDA. Wijaya Karya has booked a robust new contracts growth of 45.7% to IDR13.8trn. Although this is still below estimates, we expect it to improve in 2H22, supported by the new capital city’s (IKN) project tenders that total IDR12.2trn. Management has also refinanced a portion of its long-term debt with sukuk and bonds to reduce the impact of interest rate hikes. WIKA’s main challenge: High-speed rail (HSR) cost overruns, which are still under discussion.

• New contract updates. WIKA’s new contracts reached IDR13.8trn in June – an improvement vs last year’s 45.7% growth. Nevertheless, its achievements are slightly below expectation at 33% of the FY22 target of IDR42trn. We think new contracts will likely accelerate in 2H22, as the IKN project tender has begun since June. There are six IKN projects, which comprise three toll roads, a Presidential Palace, Presidential Office, and Presidential Secretariat Office with total value of IDR12.1trn. However, the translation to revenue happens in stages, which is higher in 2023.

• Mitigating the impact of interest rate hikes. In 1Q22, WIKA reduced its floating-rate debt to 60% (FY21: 67%) via bonds and sukuk issuances to refinance its long-term loans. The bulk of its IDR10trn bonds and sukuks (c.63%) are maturing after 2025 with average cost of funds at 8.54%. This should alleviate the effects of a 25-50bps 7-day reverse repo rate increase.

• HSR cost overruns. The funding of the HSR’s cost surge is still under discussion. The background: The required budget jumped to USD8bn (IDR114.2trn) from the initial USD6bn (IDR86.5trn). The reason: Prolonged land clearing and re-locations, which caused material prices and land purchase costs to be higher. China Development Bank recently requested the Government to cover the cost overruns. This poses an impairment risk to WIKA if an agreement is not reached or below the expected value. The company’s contract portion for the HSR project was IDR15.5trn, with the maximum cost overruns at c.IDR5trn. Note: A potential impairment will depend on the approved contract increase.

• Earnings revisions. WIKA’s contract burn rate is still below pre-pandemic levels, as customer capex has not returned. This was pictured in its 1Q22 revenue as being down 19.3% YoY to IDR3.2trn – this also includes the Bank Indonesia rate hikes. Therefore, we tone down our FY22F-23F earnings by 75% and 53%.

• We have applied a 0% ESG discount/premium into our new IDR1,100 TP using our in-house methodology. We retain our call on this stock. Key risks: HSR cost increases, interest rate hikes, and higher material prices.

Source: RHB Research - 8 Aug 2022