Analysis of IPO Waskita Beton Precast

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.