Adhi Competes in Domestic Stock Market (JSE)

Last December, I attendded UBS Equity Research Meeting on Indonesian Contractor. There were four Indonesian listed contractors who participated in this meeting, ie. adhi, Wika, Total, and Truba. It was an entirely different meeting compared to those in which I've had participated and made me shaky. It was about a numerous questions from the analysts that compared Adhi's figures to its head head competitors'. Here is their report.

They summarize that Indonesian contractors' goes margin range from 7% to 15% with civil consruction being the lowest at 7% to 11%, EPC usually posts 12%, and its foreign bussiness could be as high as 15% especially in the Middle East. Adhi and Wika enter this region while Total and Trubo still choose to play in domestic market at the moment.

Adhi is the largest construction company with 6.0% market share, followed by Wika with 4,2%, Trubo with 1.6%, and Total with 1.3% base on 2006 CEIC data. How is the growth of the insdustry? Constructions growth has strong correlation with GDP. GDP contstruction sector data suggests an encouraging trend of 14% real growth (avg. by 6% in 1996-06) and the growing contribution to total GDP of 7.0% in 2005 and 7.5% in 2006 (avg. by 6.6% in 1996-06). The track record performance figures of the four contractors as depicted for your evaluation. For 2008, it is estimated that construction spending in Indonesia to grow to USD84 billion p.a or 48% higher than in 2007.

They noted that Adhi is the first Indonesian contractor to expand overseas where expecting margin to be higher than domestic. As for the growth strategy, they evaluate more contractors, like Adhi and Wika, are taking equity positions in infrastructure project which may not necessaryly yield attractive IRRs. Other common risks include project delay and higher oil price also present risk, as cost overrun might not be entirely transferable.

While Adhi and Wika are new comer in the EPC business, Truba with its EPC subsidiary, Manunggal Infrasolusi, has been in the industry for more than 30 years. Truba is claiming as the builder of 90% of the existing coal-fired power plans and planning to have 9,158MW of power plant EPC projects in its pipeline for the next three years. As the demand for electical will outstrip supply by 2010 (assuming no additional capacity, Adhi and Wika as well as other EPC bussiness new comers are expecting to have opportunity in doing this bussiness.

Total, in another way of strategy, has not disclosed yet to follow Adhi and Wika in entering the EPC bussiness. Its strategy for growth is by entering the less premium market of building construction. However, this strategy, for some investors, does not satisfy.

Nowadays, Adhi is not the only domestic contractor to be traded in. It is expected that that the number of listed contractors will increase in the future. So, be aware as the largest contractor with its vision to be the true champion. We must work smart and hard for it!. (kgo-visi)
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