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IPO Prospect of Wika Beton

The industry of construction is identical to the concrete, where if you want to build high rise buildings, highways, bridges, etc, you would certainly need the concrete. And if Wijaya Karya (WIKA) is one of several major construction companies in Indonesia, its subsidiary, Wijaya Karya Beton (WTON), is actually the largest concrete producer in Indonesia, which has eight factories, six sales regions, and two representative offices spread from Binjai, North Sumatra, to Makassar, South Sulawesi. While their closest competitor, PT Adhimix Precast (not a subsidiary of Adhi Karya/ADHI), only has four units of concrete factories.

Although WTON is already the largest concrete producer in the country, but the opportunities for company to grow bigger is still wide open with the implementation of the infrastructure development program by the Government of Indonesia through the MP3EI (check the word in google for further information), which have been proposed since 2008, and the implementation will continue until 2025. In fact, over the last five years, the production capacity of concrete of the company is continuously increased, from 1.1 million tonnes in 2009, to 1.5 million tonnes in 2013, with an average utilization rate of 85% per year (which was meant, although WTON production capacity continues to be increase, but the new capacity is almost always get used directly). And of course, the income of the company for five years also continued to rise steadily, from Rp1.4 trillion in 2009 to Rp2.6 trillion in 2013.

Based on macroeconomics, Indonesian infrastructure sector had growth of 7.5% in 2012, which is expected as the beginning of further growth, such as China ten years ago (2004). And WTON position as the only concrete company in Indonesia which has a marketing office spread from Aceh to Papua cemented the company position as the leading player who can capture the opportunities. For example, if the Government is planning to make a big bridge in Papua, then whose concrete that will be used? Well, it is definitely WTON. In this case WTON can not be matched by other concrete producers, because when a company has only one concrete plant in Cikarang, then it is not possible for it to sell their products to Papua, as the concrete structures could not be delivered by low cost. Did you know who the supplier of concrete for construction of Suramadu Bridge? WTON, of course, because WTON is the only company in Indonesia, which is capable of producing concrete for the marine construction.

And.. oh, WTON also sells its products overseas, in this case to customers on Barrow Island, Australia, and Dili, East Timor, but its contract is over in last 2013. In the long term the company also has a vision to be one of the largest concrete player in the region of Southeast Asia.

Well, despite the above vision would require a long time to be realized, but its IPO can be regarded as a first step to achieving the vision, in this case to strengthen the company's position as the largest producer of concrete in the archipelago. From its IPO, WTON will reap the maximum funds of Rp1.3 trillion (about US$ 130 million), which would be used for expansion, namely:

  1. To manage the quarry of sand and split stone (raw materials of concrete, other than cement of course) at four different locations,
  2. Build three new concrete plant in Lampung, East Java, and East Kalimantan (so the company would have eleven plants),
  3. To continue adding the capacity of the existing plants, and
  4. To buy some construction heavy tools for rent. Sounds promising, eh?
Beyond the data and facts that have been described above, the following are also some points that explain that the company does offer a decent growth prospects:

  1. In addition to continuously increase the production capacity of the existing concrete plants, WTON also able to create some kind of new concrete products, such as box grider and hollow core slab, and it automatically offers additional revenue for the company. Currently WTON have at least nine different types of concrete products, or the highest among all competitors.
  2. In the last two years before the IPO, WTON set up two joint ventures with third parties. The two subsidiaries were then named Wika Kobe and Wika Krakatau Beton. This thing suggests that the company began to open to working with other parties to expand, after previously only working with the other subsidiaries of the Wijaya Karya Group.
  3. Wika Beton is the major supplier of concrete products, almost the only one, for almost all government-owned infrastructure projects, from Sabang to Merauke, while in the last few years, the Government itself is actively building the infrastructure ranging from toll roads, power plants, ports, airports etc. You may be familiar with Tanjung Benoa toll road in Bali, or Kuala Namu Airport in Medan, but these are only  a few among a lot of other new infrastructures that are currently underway or have been completed.
The only sticking point is the fact that the concrete industry is highly influenced by the sustainability of the development of infrastructure and property, while we are all know that the two sectors are vulnerable to a slowdown in economic growth in Indonesia, as happened recently. However, WTON performance in 2013 has increased significantly when the economic growth had slowed, and it shows that although the infrastructure industry is a bit risky, but perhaps its still have had its growth momentum. As already mentioned above, the MP3EI began in 2008, and the progress is still taking a long way to go, because the whole project would end later in 2025. Well, hopefully the new administration of the government after the elections does not mess up the long-term plan.

Okay, then what about the stock?

Before we talk about valuation, there is one interesting thing I have found when analyzing this company: Almost all internet media discusses the IPO! The articles of the IPO could be found at Antara, Tempo, Okezone, Tribunnews, Republika, Liputan6, Jakarta Post, Kompas, Neraca, including the stock market media such as Bisnis Indonesia, Investor Daily, Kontan, and Inilah, with the content of articles is tend to be copy and paste. And I think it explains why people really seemed curious with this WTON, because it was promoted very well. Including, WTON appoints four underwriters at once to carry out its IPO, and it is unusual considering other companies usually appoint a maximum of three underwriters, where they are about to hold an IPO.

Well, although WTON is fundamentally good and also offer long-term outlook, including when seen from its last financial performance in 2013 which recorded a 33.0% of ROE, but its heavy promotion makes me worried that the price of the shares would be set at high level, but fortunately not. WTON will be offered at the price range of Rp470 - 630 per share. We take the lowest, 470, then the company will obtaion a total of Rp961 billion of cash. Coupled with the last capital of the company amounted to Rp730 billion, then it will become Rp1.7 trillion. With a market cap of Rp4.1 trillion, the PBV would be 2.4 times, and the PER would be 17.0 times (WTON net income in 2013 was Rp241 billion, so the EPS is Rp28 per share, because the outstanding shares after the IPO would be 8.7 billion pieces).

For the infrastructure stocks, the valuations above are not too high, especially when considering the long-term prospects, including the PER might be lower if the company net income in the first quarter of 2014 could rise significantly.

On the other hand this valuation can not be said to be low too, especially if the price of its IPO was not 470 but more than that (maximum 630, and if JCI continues to be green as it is now, WTON could actually released at the highest price). If you considering its vigorous promotion, then regardless its initial high price, the shares will remain skyrocketed when later listing on April 3, 2014. But in terms of value, this stock is somewhat risky especially if it turns out that JCI turned down in April, so that investors would losing their appetite in buying stocks, including this WTON.

If you are interested in this stock, then you should use a small fund first, just in case if it turns down so that you could buy the stock at lower price. For the next two to three years, I think WTON will continue to have a net profit growth of at least about 20% per annum, so the shares will continue to rise. So now the problem is its entry point, of course.

PT. Wijaya Karya Beton, Tbk
Rating of Performance on Full Year 2013: AA
Rating of Share Price at 470: A

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