Move of Indonesia's capital city, new infrastructure projects boost Jakarta-listed construction stocks

Singapore

AS the Indonesian construction sector begins to put the Covid-19 pandemic in the rearview mirror, investors have been sending up the stocks of companies likely to benefit from a number of new government projects.

From Sep 1 to Nov 1, construction company Pembangunan Persero was up 31.9 per cent.

Its peer Wijaya Karya gained 32.3 per cent.

Meanwhile, the benchmark Jakarta Composite Index was up 7.6 per cent over that period.

UOB Kay Hian (UOBKH) analyst Selvi Ocktaviani said in a research note last month that the sector's price rally could have been "fuelled by news of a new capital city project to kick off in 2022".

Indonesian President Joko Widodo announced on Sep 15 that infrastructure projects for a proposed new capital city in East Kalimantan would proceed, with basic facilities expected to be operational in 2024. The project is estimated to cost 466 trillion rupiah (S$44.2 billion), of which 19 per cent will come from the state budget. (see amendment note)

The UOBKH analyst also noted that the Indonesian government's infrastructure budget for 2021 and 2022 remains high at 414 trillion rupiah and 383.8 trillion rupiah respectively, compared to its budget of 281 trillion rupiah for 2020.

Maybank Kim Eng (MKE) research analyst Farah Oktaviani, who is also optimistic about the construction sector's outlook going into 2022, said the government's spending will go towards the construction of some large roads and bridges.

Notable projects include the 206km-long Gedebage-Tasikmalaya-Cilacap toll road, with an investment value of 57.59 trillion rupiah, as well as the 7.36km-long Balikpapan-Penajam bridge, which is to cost 15.5 trillion rupiah.

Both MKE and UOBKH's analysts cited Pembangunan Perumahan and Wijaya Karya (Wika) as potential beneficiaries of these projects.

Both companies have relatively light balance sheets, said the MKE analyst.

The UOBKH analyst added that Wika, as a contractor for the 145km Jakarta-Bandung high-speed rail project, will benefit from Presidential Regulation No 93/2021, which would allow the government to use the state budget to cover the project's cost overruns.

First conceived in September 2015 with expected completion in 2018, the high speed rail project has since seen cost overruns of 27.2 trillion rupiah as of September this year.

Investors interested in Indonesian construction firms should take note of several risks, though.

Satya Ramamurthy, partner and head of infrastructure, government and healthcare at KPMG in Singapore, said it has been challenging to forecast short- to medium-term sales for Indonesian construction companies as changes to travel patterns and work-from-home arrangements continue to affect the size and timing forecasts for new projects.

"This is also why most construction companies are holding back investments in technological and skills development while they await further clarity on developments relating to the ongoing public health crisis," he explained.

UOBKH's Selvi Ocktaviani also highlighted another spike in Covid-19 cases, strict social restrictions, and a slower-than-expected economic recovery in the country as potential risks.

Still, she expects the sector to see 6 per cent year-on-year growth in new contracts for 2021. She has upgraded her rating for the sector to "overweight" on capital injection from the government, declining leverage, and potential for an increase in new contracts in 2022.

Similarly, Ramamurthy of KPMG expects the backlog of projects and pent-up demand will likely result in strong growth in the construction sector in the years to come.

The government's planned liberalisation of foreign ownership of several key infrastructure sectors will also drive further growth in the sector, he added.

He also sees the growth of power generation and transmission infrastructure needs as being beneficial for the industry, noting that the government allocated half of its 2021 budget to infrastructure projects.

"Initiatives under the National Strategic Projects as well as the 35GW power capacity programme could be expedited over the coming years, with key projects likely to be completed before the end of President Joko Widodo's second term in 2024," he noted.

Amendment note: An earlier version of this article incorrectly stated that 466 trillion rupiah converted to S$44.2 million. It is in fact S$44.2 billion. The article above has been revised to reflect this.