Kedutaan Besar Republik Indonesia
Embassy of the Republic of Indonesia
Ambassade de la RÉpublique d'Indonésie

Construction sector gears up for growth

p>Muhamad Al Azhari | January 02, 2013

As Indonesiaa��s ratio of investment to gross domestic product (GDP) has reached the highest level in the past 18 years, the construction sector is expected to benefit this year.A�a�?Construction and toll road operators have been racing to expand their business to gain advantage from the momentum of increasing domestic economic activities as well as a multi-year investment plan initiated by the government that depends on strong cooperation with the private sector.

a�?The construction sector has contributed around 10% of Indonesiaa��s GDP since 2009, higher than the average 6-8% in 2001-2007. We believe that the construction sector could benefit from the multi-year trend in the new investment cycle,a�? international brokerage JP Morgan stated in a note to clients dated November 22.A�a�?The bank cited data from financial information provider CEIC that showed Indonesiaa��s fixed asset investment to GDP ratio standing at 33% as of March 2012.

The note was prepared by Liliana Bambang from JP Morgan Securities Indonesia.a�?Local brokerage SucorInvest shares the upbeat view. In a note to clients dated November 30, it said the strong growth expected in the construction industry a�?is mainly explained by robust infrastructure projects coupled with lower project delay or cancellation in the current strong economic environment.a�?a�?The catalysts for stock price boosts in the construction and infrastructure sector were already apparent during 2011.

A major milestone was the approval of the National Land Acquisition Law by the House of Representatives in December that year, which cut the time for acquiring land used for public facilities.A�a�?The law was strengthened by a government regulation signed by President Susilo Bambang Yudhoyono in August last year that set a maximum time of 583 days for the land acquisition process for public projects, detailing the procedures for acquiring land.A�a�?Previously, no period had been set, meaning that if acquisition turned complicated, it could be stalled for years, with additional costs incurred due to legal proceedings.

The good news did not stop there. Two key international rating agencies, Fitch Ratings and Moodya��s Investors Service, upgraded Indonesiaa��s rating to investment grade, the first time the country could bask in such a status since 1997.A�The rating upgrade provided better bargaining power for construction and toll road developers to seek financing from the capital market.

Getting connected a�?As an archipelagic nation consisting of 13,000 a�?officiala�� islands and some 4,000 more spread over 5,000 km fromA�SabangA�off the northern tip ofA�Sumatra toA�MeraukeA�on the southeastern coast of Papua, the government has realized that connectivity is critical. Linking up resources, industries and people represents the key to more sustainable economic growth.A�a�?In May 2011, President Susilo Bambang Yudhoyono launched a 15-year economic development master plan, known as MP3EI, which carves Indonesia up into six economic corridors.

Realizing the plan to develop these corridors will cost Rp4,000 trillion in investment, nearly half of annual national GDP. The funds are expected to come mainly from the private sector, with the aim of catapulting the country into the ranks of the 10 biggest economies in the world by 2025.a�?Yudhoyonoa��s administration is aiming for a breakthrough after sluggish growth in investment in the years after the 1998 financial crisis.

a�?The roll-out of these major projects could continue to bring positive news-flows to Indonesian infrastructure players (contractors and toll roads),a�? JP Morgana��s note said.A�a�?During 2012, performance of construction and infrastructure-related stocks was positive, although some declined due to factors unrelated to the overall investment climate.a�?a�?State companiesa�?Three state builders – Wijaya Karya (WIKA), Adhi Karya (ADHI) and Pembangungan Perumahan (PTPP) – enjoyed a strong increase in their stock price in the year-to-date period (see table). WIKA stocks rose by 157% to Rp1,570 as of December 11, ADHI by 253% to Rp2,050 and PTPP by 88% to Rp910.a�?Financial earnings at the three builders were strong in the first nine months of 2012.

Natal Argawan, corporate secretary for WIKA, told GlobeAsia that the companya��s net income was expected to grow 21% in 2012, up from Rp354.49 billion in 2011. a�?The target is achievable. Around 55% of the earnings will come from direct business and the remainder from our subsidiaries,a�? he said.a�?WIKAa��s direct business includes civil construction, building government-owned buildings and the construction of industrial plants and power plants. The company, which is 66.3% controlled by the government, booked Rp282.6 billion in net income in the January-September period, up 31.42% from the same period a year earlier, hitting 66% of the total full-year net income target.a�?Revenue in the first nine months rose 17% year-on-year to Rp6.37 trillion.

The bulk of the companya��s revenue still comes from the state budget, regional government budgets and other state-controlled companies.a�?Ganda Kusuma, finance director at WIKA, said earnings are being supported by a strong order book for projects.A�Up to October 2012, new projects stood at Rp12.03 trillion, or 73% of the Rp16.52 trillion target.a�?Meanwhile, ADHI booked a 192% year-on-year increase in net income to Rp88.52 billion in the first nine months of this year. Growth in net income was supported by rising operational revenue, supported by a strong increase in construction contracts.

From January to September, ADHI sealed Rp7.9 trillion worth of new contracts, 58% of the total target set for this year of Rp13.5 trillion.A�a�?ADHI plans to revive the abandoned monorail project in Jakarta and has invited a company owned by the Jakarta municipal government to join it. The monorail project, for which groundbreaking occurred as far back as 2004, has been delayed numerous times due to internal rifts among investors and funding problems. The plan to revive the project would cost Rp12 trillion to Rp13 trillion.

a�?We continue to like ADHI for its dominant position in the Indonesia construction market, strong earnings growth, and improved trading liquidity,a�? the November 30 Sucorinvest note said.a�?PTPPa��s earnings are also attractive. It booked a 73% year-on-year increase in net income to Rp105.6 billion in the January-September period. Revenue from engineering, procurement and construction jumped six-fold in the period to Rp823 billion from Rp117.8 billion.A�a�?The company has set aside Rp455 billion for capital expenditure this year for building property, offices, toll roads, ports and other infrastructure, said the companya��s corporate secretary, Betty Ariana.a�?PTPP has won the tender to handle six construction projects worth Rp8.2 trillion for the Kalibaru container terminal in Tanjung Priok, North Jakarta.

The work includes building a container yard, a breakwater disposal and a breakwater container yard. It will also include overburden and reclamation projects.a�?The stock price of state-controlled toll road operator Jasa Marga also saw a significant price increase during 2012, rising 36.9% to Rp5,750 at the time this magazine went to press.A� The stock price increase was supported by strong financial earnings. The company booked a 34.47% increase in net income in the January-September period last year to Rp1.25 trillion.A�a�?Jasa Marga has set aside up to Rp7 trillion ($727 billion) for capital spending this year, to be used to acquire another toll road concession, build new toll road sections and maintain its existing roads, although the figure is lower than the Rp7.7 trillion outlaid in 2012.

Jasa Marga will use internal funds to finance 30% of this yeara��s investments, finance director Rinaldi Hermansyah said earlier.a�?a�?Private sectora�?Similar positive stock performance was also shared by the major private construction companies. The stock price of Total Bangun Persada (TOTL), one of the largest private construction companies, rose 229% last year.A�Corporate secretary Elvina Apandi Hermansyah says the company expects its profit to grow 20% during 2013 on booming construction deals.a�?The Jakarta-based company aims to post net income of Rp210 billion ($22 million) in 2013, up from last yeara��s Rp175 billion target. Revenue is forecast to jump to Rp2.1 trillion, from the 2012 target of Rp1.9 trillion.

a�?We are confident of reaching that target next year,a�? Elvina said.a�?The Jakarta-based company is eyeing net income of Rp210 billion in 2013, up from last yeara��s Rp175 billion target. Revenue is forecast to jump to Rp2.1 trillion, from the 2012 target figure of Rp1.9 trillion.a�?The stock price of private toll road developer Citra Marga Nusaphala Persada (CMNP) also rose by 22%. It has put aside almost Rp2 trillion for capital expenditure this year as it looks to kick-start some projects.

Indrawan Sumantri, the companya��s corporate secretary, said CMNP will spend at least Rp1.2 trillion to start construction of a 22.8-km toll road connecting Antasari in South Jakarta and Depok in West Java.A�Citra Marga owns a 62.5% stake in the Rp4.76 trillion ($495 million) project. The project will be completed within a year and a half, generating Rp686 billion in revenue during its first year of operation.a�?To finance its capital expenditure, Citra Marga plans to sell Rp1.2 trillion of bonds, Indrawan added. The company has named Indo Premier Securities, Sucorinvest Central Gani, Ciptadana Securities and Equator Securities as financial advisers for the debt sale.a�?Two private infrastructure companies saw their stake decline: Bakrieland Development (ELTY) and Nusantara Infrastructure (META). Stocks in the Bakrie unit fell 54% during 2012 while META declined 9%. Analysts said Bakrielanda��s collapse was because of negative sentiment about Bakrie Group companies.

Meanwhile, Nusantara Infrastructure saw a major shareholder change in early 2012.A�a�?a�?Overall sector outlook a�?Looking forward, the two brokerages saw strong growth in both construction and toll roads. a�?News flow on Indonesian infrastructure is likely to remain positive until the first half of 2013, with the tender and construction of mega projects such as the six Jakarta urban toll roads, Soekarno-Hatta Airport, Tanjung Priok Port, Jakarta Mass Rapid Transportation and Jakarta Monorail,a�? the JP Morgan note said.a�?SucorInvest noted that construction stocks were still trading at a 31% discount to their peak before the global financial crisis. a�?We also believe the sector remains a defensive domestic play which has benefited from investorsa�� sector rotation from commodity-related stocks,a�? SucorInvest said. GA

Source: The Jakarta Post –