EVA Brief: WEGE (Wika Gedung)

Bloomberg short description: PT Wijaya Karya Bangunan Gedung operates as a construction company. The Company offers feasibility study, planning, engineering design, building construction, project management, funding, and operation and maintenance services. Wijaya Karya Bangunan Gedung serves customers in Indonesia.

So far, WEGE has been a consistent value creator, displaying ability to generate a sustained positive Economic Profit (EVA). Its EVA surged in 2017 and 2018 as the chart below shows. It declined quite a lot recently for the past 12 months in Q3 2019.

How does WEGE able to increase its EVA during 2016 -2018? The key answer is because WEGE sales growth was really, really high. Sales growth yoy was 102% in 2017, and 50% in 2018.

Which is backed by aggressive new contract growth in 2017 which was almost 70%. That 2017 explosive new contract growth effect still reverberates to sales growth in 2018 although there is practically no new contract growth in 2018. The chart below includes JO contracts.

In 2019, it is likely WEGE manages to get IDR 10 T new contracts, that’s around 30% growth. In this year (2020), management sets target for 50% growth in new contract. That means another super sales growth again in this year. I think sales growth could reach 30% to IDR 8 T at the least (2019 sales level is likely around IDR 6.2T).

Source: Company

Notice that there is a big change in its project owners. Before the era of explosive growth, project owners were mostly private sectors. From 2017 onward, the government and SOE have become substantial project owners. I believe it will remain this way for a long time.

Source: Company

If you think there is no price for that growth, you would be mistaken. It is, in fact, the reason why EVA tumbles quite substantially in LTM Q3 2019 (EVA momentum was -1.9%).

When you take more projects from SOE, you would incur more receivables as they lack in cash and will defer their payments. When you take more projects from the government, the government would require you to do joint operations where you need to make some investments to create the joint entity. In both cases, investors’ money is tied so that WEGE could get projects. Invested capital goes up, and profitability (EVA margin) suffers. On a better side, the impact to operating margin seems minimal.

In the above chart, you saw that invested capital charge spiked in Q3 2019. That is because of significant increase in investments (in the form of JV) for Taman Sari park construction. In one instance, I found out that is because Taman Sari is owned by Wika Realty, another subsidiary of the parent company, and apparently, Wika Realty is planning to go public in this year or next year. Another source of significant increase in capital is in receivables from Makassar Airport project given by the parent.

I highly suspect that more and more capital will be tied in operations (rising invested capital) going forward. This trend will contract EVA, and sales growth would not add much value anymore. The value drivers going forward will be in profitability, not growth.

Even assuming sales level of IDR 8 T in this year (50% sales growth from LTM Q3 2019 of IDR 5.3 T), I do not think EVA would change a lot. Most of value added by growth would be eliminated by declining profitability (EVA margin), as more investments are required.

My take:

That being said, I do not think WEGE would become a value destroyer anytime soon. If the market thinks WEGE as a value destroyer, that would be the time I draw a line and say, ‘the market has taken it too far, and now it is overtly undervalued’.

At the current price of 308/share, the market is still viewing WEGE as a value creator, although investors are expecting WEGE EVA momentum to contract by -0.6% for the next 5 years from the most recent performance. That is definitely not an optimistic view. It is quite realistic, I might say. At the current price, it is not a bad deal, but not great.

PS:

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