The initial public
offering (IPO) of Waskita Beton Precast may be the most discussed IPO on the Indonesian
stock market in 2016, due to several factors. First, it’s a SOE, and if you
look at the previous IPO’s of SOE where their share price has risen
significantly, such as Wijaya Karya Beton (WTON) or PP Property (PPRO), then
the Waskita Beton IPO is also predicted to be a success. Second, when the
Jakarta Composite Index (JCI) gained a lot in the last three months, the stocks
of second liner SOEs (whose share prices are in nominal of hundreds of Rupiah) has
risen more, and the initial price of Waskita Beton also at the range of Rp400 -
500 per share. And third, Waskita Beton main business, ie the manufacture of
precast concrete and ready mix for construction of highways, bridges, etc, is
related directly to the development of infrastructure. And since one or two
years ago, arguably there is no other story that is more consistent in the
market except about these infrastructure things.
However, about the
company itself, do you have any idea, what is concrete precast and ready mix?
Then how about prospects, business risks, as well as the track record of the
company's financial performance both historically and currently? Okay, we’ll
discuss it here.
PT Waskita Beton Precast
is a subsidiary of PT Waskita Karya (WSKT). As a construction company, WSKT
certainly have a business unit in the field of manufacture of precast concrete,
ie the cement concrete for the construction of flyovers, power poles, culverts,
railway sleepers, etc., which is casted at the plant and sent one by one to the
construction site, and then installed. Here are pictures of some types of
precast concrete manufactured by the company (click image to enlarge):
Until June 2016, Waskita
Beton has eight plants of precast concrete located not far from construction
projects belonging to WSKT (most of them are construction of the toll road),
namely in Cibitung (Cikarang, West Java), Sadang (Subang, West Java), Kalijati
(Subang), Purwadadi (Subang), Karawang (West Java), Serang (Banten), Sidoarjo
(East Java), and Palembang (South Sumatera). Approximately 87% of the company’s
revenues derived from the sale of precast concrete, generally to a fellow
subsidiaries of WSKT, and the rest comes from sales of ready mix, ie liquid concrete
that is casted directly on the construction site (by using those big concrete
trucks, you know). Waskita Beton booked a net income of Rp230 billion until the
second quarter of 2016, reflecting an annualized ROE of 24.7% based on the
equity value of Rp1.9 trillion, or we could say good enough. In 2014 and 2015, the
ROE also stable above 20% per annum.
Well, when the new Government
of Indonesia under President Jokowi administration officially inaugurated in
October 2014, PT Waskita Beton Precast also directly established in that
October, with the target to hold an IPO three years later (under the rules of
the Indonesian Stock Exchange/IDX, a company/PT can only hold an IPO if it has
been established and has operations for at least three years). So when the
Government quickly disburse funds into SOEs including WSKT (to help them to build
infrastructure) through the mechanism of the state capital participation (or
right issue, if the SOE was a public company), where WSKT had its own right
issue in 2015, there is also another option to raise additional funds from
investors in the stock market through the mechanism of IPO.
But if WSKT has been
listed on the IDX since the beginning, how could we hold an IPO for it? Well,
we can hold an IPO for its subsidiary.
What if WSKT does not have a subsidiary? Easy. You go to public notary,
establish a company/PT where WSKT becomes the shareholder (so the new PT will
have a status as a subsidiary of WSKT), then place the some of WSKT’ business
units under the new company, then wait three years. Thus PT Waskita Beton Precast
is established, with the manufacture of precast concrete as its main business
(‘beton’ means concrete in Indonesian language). In the case of Waskita Beton
IPO, the Government does not need to wait until three years since the
establishment of the company (Waskita Beton will be listing on September 20, or
less than 2 years since the establishment of the company), but it seems that
the IDX has made an exception.
So if you join the IPO,
then we could say that you are participating in the long term plan of infrastructure
development initiated by the Government. From its IPO, Waskita Beton will
receive additional capital of about Rp4 trillion, which will be fully used for
working capital (purchase of raw materials, pay employee salaries, etc.), to
build new plants, and to increase the production capacity of existing plants.
Because WSKT as the parent company has already gained a lot of construction
contracts until a few years ahead, especially the construction of toll roads
and power transmission networks in Java and Sumatra (and WSKT alone had obtained
additional funding of Rp5 trillion from the last year’s rights issue to fund
such projects), then Waskita Beton does not have to worry about the lack of
buyers for its products of concrete. The total value of the construction contract
obtained by WSKT itself until June 2016 was Rp45.7 trillion, rose significantly
compared to 2014 and 2015, and this does not include additional contracts that
can be obtained in the future. So if we talk about prospects, it is quite clear
that Waskita Beton offers a long-term prospect of profitable investment.
And what about the
shares?
Through its IPO, Waskita
Beton will sell 10.5 billion new shares to the public, which reflects 40% of
the company's outstanding shares. Let say we take the lowest price, Rp400 per
share, then Waskita Beton will earn Rp4.2 trillion of funds, so that the company's
post-IPO equity value would be Rp6.1 trillion. Because the number of shares after
the IPO was 26.4 billion shares, the book value will be Rp231 per share, and the
PBV = 400 / 231 = 1.7 times.
And because the average
PBV of construction stocks on the IDX is 2 or even 3 times, that PBV seem cheap
at first glance. But look: The valuation of the construction sector these days
is on its peak level along with the market bullish, or in other words, the
valuation of construction stocks at this time does not reflect their average valuation in the long term,
because we knew that the JCI would not always as high as today, where there was
a time when it went down, and it will go down again someday, because it is a normal market cycle.
For example, when the JCI
was in its bottom in August 2015, construction and property stocks were also
dropped to a very low position, that PBV of Adhi Karya (ADHI) (this is one of
the may favorite stocks in the construction sector) was only 1.4 times.
Similarly, PP
Property (PPRO), which tumbled to as low as Rp130 per share, which
reflects PBV at only 0.9 times. As another example, in 2013, the JCI was
speeding from 4,300’s until peaked on 5,250’s by mid-year (gained nearly 1,000
points in just over six months), and ADHI et al also rising insanely until their
PBV reach 4 times or even more. But in the second half, JCI began to fall and
continued to fall, until return to 4,200's. While ADHI? Well, after soared from
2,500 to 4,000 in only a matter of weeks, but it eventually fell to a position
that is even lower than before the market bullish, ie Rp1,400's per share. And
at that bottom price, the PBV was only 1.4 times.
My point is, if we use
the average valuation of construction stocks in the looooong term, say in five
years where the stock market will experience the periods of bullish and bearish,
the average PBV of construction stocks is actually not 2 – 3 times but much
lower, more or less equal to the average PBV of other stocks in general.
Instead, because currently the PBV of construction stocks are on the level of 2
– 3 times, it means that the JCI is
already high, that although in the short term there is still a chance that
the JCI will rise further (as in the past, the PBV of WSKT et al could even
reach 3.5 – 4 times), but in the long term the market eventually going down for adjustment. And
that, once again, is a very normal market cycle.
Between the Market
Cycle and Timing
Then, based on the
experience, when a company hold an IPO, the stock will experience some kind of transition period, in which the
investor's decision to buy or sell the shares in the market will be influenced
by things that are not directly related to the company's fundamentals, namely (as
already mentioned above): 1. The history of early IPO’s, 2. Nominal price of the
shares, where the shares with a nominal value of hundreds of Rupiah will usually
rise higher than shares with a nominal value of thousands, and 3.
Positive/negative sentiment related to the company, or the industry.
And most important of
all is: Conditions of the market.
You know why people keep talking about the IPO of Waskita Beton, and the IPO is
predicted to be a success? Well, it was not because it is a good company, the
stock price is cheap, or the like, as not everyone can analyze these things,
but because the market is in a good bullish period, where the JCI kept rising
and almost everybody is in a profit position and has enough money to buy new
shares/IPO, especially if the company is related to the positive sentiment of
infrastructure development.
But if later the JCI go
down, the people will not enthusiastic anymore with the IPO, and the stock may
crash in its first trading days. So in this case the factor of timing greatly influence the success of
an IPO. The IPO of Wijaya Karya Beton (WTON) in April 2014 was a success
because the JCI was rising, and continued to rise in the ensuing months. But the
story of PP Property (PPRO) was different, that despite its stock also had
jumped from the price of Rp185 to 250 per share in a matter of days after the
initial listing in May 2015, but as the JCI started to going down, the stock
also slipped down to as low as 127 in August 2015. The more tragic story was
for Garuda Indonesia (GIAA), who also did a large size IPO in February 2011
(worth US$ 400 million), but the JCI was dropped on the period. So the stock mercilessly
tumbled from the initial price of 750 on its very first trading day, until
finally stuck in Rp200’s per share.
So, during this 'transition period',
the movement of IPO stocks will be more affected by external factors
such as fluctuations in JCI, stories in the public, etc. Then after a few months or one year, only then the people will turn their
attention into
the fundamentals
and long-term business prospects of the company. The stock
of PPRO
could rise to its present position because the company has an excellent
performance. While GIAA, although it is also rising in line with the
euphoria of the stock market, but until the year 2015 it was stuck
at its bottom andl almost going nowhere, as the company suffering losses.
In conclusion, for Waskita
Beton is also the same: The company performs well, prospects are good, and the valuation is
quite reasonable. But during its transition period, people will pay no attention
at these,
but rather look at the position of JCI and others. So now you have two options: If you think
that the
JCI will
continue to rise in the short term, at least until the 20th of September (that’s Waskita Beton listing
date), then go ahead, you can buy the stock from now. Do not worry, this company
is actually a good
one.
But if you think
that the
position of JCI was risky at this moment, where the trend could
turned at
any time, then you better buy the stock later in the market. The point once again, Waskita
Beton is a good company indeed, but it's just a matter of timing only.
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