• Keep BUY and IDR940 TP, 74% upside. Waskita Karya’s performance is starting to see improvements, with 1H22 revenue rising 29.3% YoY as working capital improved post restructuring and rights issuance. However, operating losses rose on higher material costs. We expect project activities to further accelerate in 2H22, as the company is set to gain IDR4trn from a right issuance this year. It also plans to recycle five assets, and expects IDR4-5trn proceeds from the transactions.

• 2Q22 revenue saw improvements after WSKT’s restructuring and rights issuance, coming in at IDR3.3trn (+21.6% QoQ, +63.9% YoY), despite the fewer working days due to Lebaran. Stronger working capital brought 1H22 topline to IDR6.1trn (+29.3% YoY). However, this was still below expectations at 24% and 30% of our and consensus’ forecasts. As government budget spending is expected to accelerate in 2H22, WSKT’s performance is likely to improve as well, in our view.

• Waskita Beton Precast’s (WSBP) restructuring turned earnings positive. Opex rose 25.6% YoY as project activities increased. However, operating losses in 1H22 grew to IDR850bn (+22.4% YoY) on the back of higher material costs, such as for cement, steel, and oil. Nevertheless, 2Q22 earnings turned positive at IDR594bn (1Q22: -IDR831bn), owing to the IDR2.1trn recovery from WSBP’s debt restructuring.

• New contract update. Up to June, WSKT has secured new contracts worth IDR9.3trn – up 197.3% YoY, and accounting for 31% of its FY22 target (IDR30trn). It participated in the new capital city (IKN) project tenders, which involve the construction of three toll roads. We believe the company has the strongest capabilities for these toll road projects, which have a total value of IDR7.9trn. If WSKT wins the project tenders, it will be positive for the company, as it will likely be a progress payment project.

• Another rights issuance in 2022. This year, the company is expecting another state injection of IDR3trn, and IDR1trn from the public. The exercise price has not been revealed – we believe it will be above IDR620/ share.

• 5 more assets to be divested. WSKT plans to divest five toll roads this year, of which Kanci-Pejagan and Pejangan-Pemalang are expected to be divested through Indonesia Investment Authority (INA). Through the asset recycling, the company targets IDR4-5trn in proceeds and IDR14trn debt deconsolidation.

• ESG overlay: Our TP includes a 6% ESG discount, based on its 2.7 ESG score. Key risks: Interest rate hikes and high material costs. Upside catalyst: Successful asset recycling and securing the IKN project tender.

Source: RHB Research - 8 Aug 2022