Best Stocks in Construction Sector

If you are including those who are not too affected by negative coverage by TvOne and MetroTV when the Republic of Indonesia was led by President Susilo Bambang Yudhoyono, then you would be able to see that over the last decade, or especially in the last five years (2009 – 2014), Indonesia has experienced significant progress in terms of infrastructure development. FYI, Indonesia is now one of the countries with the most number of airports in the world, including international airports, where most of the new airports were built in the last ten years. Today, tour and travelling is one of the most promising business in the country.

In many other infrastructures such as the construction of highways, railway stations, power plants, to telecommunications networks and the Internet, all of them also experienced significant growth, although still concentrated in Java Island. However, when I travelled to Medan, North Sumatra, and Makassar, South Sulawesi, the quality of internet signal in these towns was quite good, including the city of Makassar also has a long and smooth highway. So for the problem of lack of other infrastructure, it might only a matter of time before solved. At the end, the Government also requires a time of years to be able to build a comprehensive infrastructure in the country with the size of Indonesia, because we are the largest archipelago in the world.

Various development projects of infrastructure that is carried out during this time, encouraged significant growth for construction companies, especially state-owned construction company where they are usually the ones who won the project tenders for the construction of highways, bridges, etc. that are belong to the Government. Adhi Karya (ADHI), for example. In less than six years, this best state-owned construction company on the Stock Exchange in terms of fundamentall (by TeguhHidayat.com, of course) was able to continue to gain profits, which led to significant increase in the company’s net asset value from Rp600 billion at the end of 2008, to Rp1.5 trillion in the third quarter of 2014, although ADHI is quite generous in paying dividends, ie about 30 – 40% of its net profit each year. In line with its financial performance, the stock of ADHI was also flying high in the last five years, and similarly with other construction stocks.

The question is, will this positive trend continue? Luckily, under the new government led by President Jokowi, the vision for infrastructure development is likely still to be continued. If Indonesia has currently the good infrastructure of air transport (airport, aircraft), and land transport (railways), the story is totally different for the sea, while in fact, as already mentioned earlier: We are the largest archipelago in the world. Inequities in infrastructure development, including the differences in the selling price of commodities such as fuel and cement that are very striking between Java Island and Papua, for example, it is because we do not have adequate maritime infrastructure, that is capable of connecting Sumatra, Java, Kalimantan, Sulawesi, to Papua. Other major countries like the United States, for example, they are relatively not have problems in terms of infrastructure development distribution, because they could easily send cement and iron from the east coast of New York to the west coast of California or otherwise, by the road (or train), without the need to use the ship at all.

That's why, when President Jokowi on many occasions stated that he will focus on the development of marine infrastructure, then it is a right decision. If this vision can be realized, then in the next few years Indonesia will have plenty of ports, harbor, and shipyards with international standards. And of course, the construction companies will again receive many jobs of port development projects, etc.

In conclusion, I’m agree with the Astra Group which acquire PT Acset Indonusa (ACST), that the construction sector is still attractive for investment, including long-term investments of up to five years.

The next question, which stocks in this sector that could be picked? Well, if we take a look on experiences where the tenders of infrastructure projects are usually won by SOE construction companies, then the choices are not far from ADHI, Wijaya Karya (WIKA), Waskita (WSKT), to Pembangunan Perumahan (PTPP), where the four have the prospect of further gain from the projects of infrastructure developments in the future.

But in value investing we pay only a little attention to such prospects, as we take the valuation of the stock first. And unfortunately at this time, the valuation of the four stocks are nothing but too high. Here's more, where the stock price is on November 24, 2014.

Stocks	Price (Rp)	PER (x)	PBV (x)	Dividend (Rp)	Dividend Yield (%)
ADHI	2,775	37.1	3.3	68	2.4
PTPP	3,010	37.7	6.8	26	0.9
WIKA	3,035	34.9	4.5	28	0.9
WSKT	1,045	58.7	4.2	11	1.1

Based on experience, when you buy shares at a high valuation/price, you might still make a tidy profit when the market/Jakarta Composite Index (JCI) were on normal or bullish, but the risk would be extremely huge when the market fell down. In 2013, where JCI rallied in the first half, ADHI rose until touched the level of Rp4,000 per share, before then slashed down to as low as 1,425, or tumbled more than 60 percent! So if you bought ADHI at prices anywhere near 4,000 and do not sell it until today, then I’m sure that you are still stuck in this stock, because the current price of ADHI is only 2,775. You have to notice that, in terms of its fundamentals/financial performance, there is nothing wrong with ADHI. Your mistake is when you bought it at a price that is too high, that's it.

Again, in value investing we have to look at 1. Quality of financial performance/fundamentals of the company, 2. Valuation of shares, then after that you may look at 3. The prospect. This is why I’m not so interested in the shares of shipping companies, because although their prospects seem attractive due to the plan of maritime development by President Jokowi, but only few of them that has a good track record and consistent performance in recent years. So we better focus on construction, and here is a simple but comprehensive analysis of the sector:

Stocks	Price (Rp)	PER (x)	PBV (x)	ROE (%)	Equity Growth (%)
ACST	3,285	17.8	2.7	15.1	8.8
ADHI	2,775	37.1	3.3	8.9	(1.4)
DGIK	175	13.3	0.9	6.6	3.6
NRCA	930	8.3	2.5	30.0	17.6
PTPP	3,010	37.7	6.8	18.0	8.2
TOTL	990	21.5	4.5	20.9	(0.2)
WIKA	3,035	34.9	4.5	12.8	41.1
WSKT	1,045	58.7	4.2	7.1	1.4

And now, based on the table above, which stock that, at its current price, is the best choice for value investing? That's right.. Nusa Raya Cipta aka NRCA! NRCA’ growth in terms of net asset value throughout the first nine months of 2014 (or I used to call it: the real growth) was the most stand out that reaching 17.6%, from Rp786 billion at the end of 2013 to Rp924 billion on 30 September 2014 (the real growth of WIKA indeed reached 41.1%, but that's because the company received additional equity from the IPO of its subsidiary, Wijaya Karya Beton/WTON). If NRCA did not paid dividends amounting to Rp69 billion in last May, then the growth rate even reached 26.4%, or far above the average growth of the market.

Because of the growth, while on the other hand the share price have not been going anywhere, then NRCA’ current valuation is pretty attractive. You can see for yourself in the table above, where from the side of PBV, NRCA is the cheapest stock compared to others (PBV of DGIK was only 0.9 times, but unfortunately its financial performance is not good, it can be seen from its ROE, that is the smallest among all of them). When we discussed about NRCA at the time when the company held its IPO in July 2013, I said that, because the equity value of the company at the time was only Rp528 billion, then the price of Rp1,040 per share is of course very expensive, which reflects PBV of 4.3 times. So I estimated (or rather, expected) that NRCA would go down. The good news, it’s down! And now see the condition: NRCA’ equity has reached Rp924 billion, and considering that the growth rate was very significant, the equity value could reach Rp1 trillion by the end of the year, so that we can say that the real value of NRCA has rose to nearly two-fold in just a little over a year. The good news, once again, the share price is still at the level of 930.

Another interesting fact is, in the long run, NRCA also has a solid track record, probably one of the best in the Stock Exchange, considering the company has been rarely used excessive leverage. Here's the details:

NRCA	2009	2010	2011	2012	2013	CAGR (%)	Average
Equity (Rp billion)	126	155	176	268	786	58.1	-
Liabilities (Rp billion)	253	357	538	568	840	35.0	-
Revenue (Rp billion)	892	1,008	1,582	2,024	3,006	35.5	-
Net Profit (Rp billion)	17	29	46	92	188	82.2	-
ROE (%)	13.5	19.0	26.1	34.3	23.9	-	23.4
DER (x)	2.0	2.3	3.1	2.1	1.1	-	2.1

You may notice that this company meets the two main criteria of Warren Buffett on 'an excellent business', ie the consistent and significant growth (the CAGR all above 30%, although for CAGR of equity should be noted that it was because the company received funds from its IPO in 2013, amounting to Rp 250 billion), and the company is also able to generate huge profits by just using small debts. As a construction company, it is natural that NRCA’ debts are larger than its equity. But compared with other construction companies, then we could say that NRCA is prudently managed, where this is in line with the policy of its parent, Surya Semesta Internusa (SSIA), which is only have a relatively small debts.

However, the PBV of 2.5 times is actually not too low, especially if we consider the fact that NRCA is only a middle-class construction company that 'dry' of prospects because of its status as a non-state-owned enterprise, which means that the company’s opportunity to obtain a piece of cake from the development of ports, etc, is relatively small. So if you want to be really safe, the best entry for this stock is in the range of Rp800 – 850 per share.

But fortunately, talk about the outlook, NRCA is not that dry. As you know, the company is one of the main contractor of the construction of the Cikampek – Palimanan toll road, where the work is already begun and is scheduled to be completed in 2016. If the toll road project can be completed on time, then the company of course will have other infrastructure projects from the Government. In fact, NRCA does have the experience in the development of road infrastructure. At the end of the '60s, the company worked on construction project of 145 kilometers highway in the province of South Sumatra.

And if we compare the valuation of NRCA with all other construction stocks, then it’s obviously affordable. If the company is able to continue the positive trend of its performance until the beginning of 2015 (in which, at the time, the net asset value of the company should be already above Rp1 trillion), the medium-term target of Rp1,200 is quite realistic. So, given that NRCA can only go down to 800 or below if the JCI was down, then you may buy it at current price. If you are a technicalist, you will be able to see that, despite its fluctuations, the stock of NRCA has uptrend movement in the last one year. So let me tell you that the technical of this stock is actually in line with the fundamentals.

Okay, that’s for NRCA. And what about the other construction stocks? Well, if you notice, the financial performance of TOTL, ADHI, WIKA, and PTPP, was not too bad compared to NRCA (while DGIK and WSKT were bad). But take a reflect on the past experience of the year 2013, the best timing to get into ADHI et al is when the JCI shattered. You may see that the construction stocks (except NRCA) were fell of more than 60% when the stock index dropped to its lowest point (while NRCA only dropped to 700s when the market was destroyed by the end of 2013 and then, or only down less than 20% compared to the price before the corrections, ie 800 – 900), but they went up once the market recovers. Note: If you bought ADHI at the price of Rp2,000 per share at the beginning of 2014, then you might have 50% of gain, because ADHI was once reached 3,000. For the other construction stocks, the story is the same.

While for Nusa Konstruksi Enjiniring (DGIK), I keep paying attention to the stock because of its very low valuation (its PBV are less than 1.0), and this is sooo low even if compared with NRCA. But still, because the company has a less impressive performance, both historical and current, then I think that we cannot buy it yet. We’ll see next quarter.

Okay, I think that's enough. Any comments?

Disclosure: When the article was published, Teguh Hidayat & Partners is in a position of NRCA on an average price of Rp910 per share. This position can be changed at any time without prior notice.