Construction companies in Indonesia are expected to grow strongly, supported by the availability of many new construction contracts, in the second half of 2016. Particularly state-controlled construction firms are expected to benefit from the government's push for infrastructure development. The central government's budget for infrastructure development has risen significantly in recent years (see table below), while the government also tries to direct part of the funds that are generated through the tax amnesty program toward infrastructure development.
In the second half of 2016 numerous contracts are expected to be awarded to Indonesian construction companies as several big infrastructure projects have been tendered in the first half of the year. Those companies that are closely linked to the government (because they are partly owned by the government) and have a good track record are considered to be in the best position to be awarded construction contracts. This includes listed companies such as Adhi Karya, Wijaya Karya, and Waskita Karya.
However, according to research conducted by RHB OSK Securities three state-controlled entities - Adhi Karya, Wijaya Karya, and Pembangunan Perumahan - collected a combined total of IDR 20 trillion (approx. USD $1.5 billion) worth of new contracts in the first five months of 2016 an amount that is lower compared to new contracts gained during the same period one year earlier. This drop is attributed to a delay in the tender process of several infrastructure projects in the first half of 2016.
The central government of Indonesia is optimistic that the recently launched tax amnesty program will contribute significantly to Indonesia's tax revenue. This would imply that the government's budget deficit will remain under control and implies that the government will not need to cut its record high infrastructure budget this year. Moreover, repatriated funds that are brought back home are targeted to be redirected into investment instruments - for example bonds - that aim to finance infrastructure development in Southeast Asia's largest economy.
Indonesia's Infrastructure Budget:
According to RHB OSK Securities, Adhi Karya is the most interesting construction company as it is assessed to have most room for growth in revenue, profit and the value of its shares. With a price-to-earnings ratio of 14.2 times it is regarded 'cheaper' than most other listed construction firms. The light rail transit (LRT) project in the Greater Jakarta area is expected to add IDR 33 trillion (approx. USD $2.4 billion) worth of new contracts for Adhi Karya in the years ahead. The company was awarded the contract to construct the part of the LRT that is located in and between Jakarta's satellite cities. However, Adhi Karya is also still in the race to win the contract to build the part of the LRT that is located in the capital city of Jakarta. Besides new contracts gained directly through the LRT project, the company is also expected to obtain a variety of new contracts for infrastructure or property development located next to - or near - the new LRT line.
Three Attractive Construction Companies:
|Adhi Karya|| Buy
|Pembangunan Perumahan||Buy||IDR 4,200||20.0|
|Wijaya Karya||Neutral||IDR 2,665||23.6|
Source: RHB OSK Securities
What are the 30 priority infrastructure projects of Indonesia (2016-2019)?
|Priority Infrastructure Projects 2016-2019|
|Balikpapan-Samarinda Toll Road||National Capital Integrated Coastal Development (Phase A)|
|Manado-Bitung Toll Road||Waste Processing System Jakarta|
|Serang-Panimban Toll Road||Development plan Water Supply System Semarang|
|Trans Sumatra Toll Road||High Voltage Direct Current|
|Soekarno-Hatta Railway||Electricity Transmission Sumatra|
|North-South Line Jakarta MRT||Central-West Java Electricity Transmission|
|Makassar-Parepare Railway||Batang Power Plant|
|Kuala Tanjung Port||Electric Steam Power Plant Indramayu|
|Bitung Port||Electric Steam Power Plant South Sumatra|
|Karangkates Hydroelectric Power Plant||Bontang Oil Refinery|
|Kesamben Hydroelectric Power Plant||Revitalization Refinery Development Masterplan|
|Lodoyo Hydroelectric Power Plant||West Java Port (northern coast)|
|Inland Waterways Cikarang-Bekasi-Sea||Tuban Oil Refinery|
|LRT South Sumatra||Palapa Ring Broadband|
|LRT Jakarta||East Kalimantan Railway|