Smelling the roses - CIMB Group

Construction│Indonesia February 5, 2015

COMPANY NOTE

Nusa Raya Cipta NRCA IJ / NRCA.JK

Market Cap

Avg Daily Turnover

Free Float

US$283.0m

US$0.39m

18.0%

Rp3,574,080m

Rp4,810m

5,696 m shares

Current

Rp1,440

Target

Rp2,100

Prev. Target

N/A

Up/Downside

45.8% Conviction|

|

Smelling the roses

Notes from the Field

NRC stands to benefit from the ample job flows brought about by the new government’s commitment to infrastructure development. It is the only sizeable private contractor to boast a track record in constructing one of the longest sections in the long-awaited Trans Java toll road. ————————————————————————————————————————

Linda LAUWIRA T (62) 21 3006 1734 E [email protected] Company Visit Channel Check

Expert Opinion Customer Views

———————————————————————————————————————— Show Style "View Doc Map"

Contents

We initiate coverage with an Add rating and target price of Rp2,100, based on 15.3x CY16 P/E, a 15% discount to the sector’s upcycle P/E. We project a 3-year earnings CAGR of 30%, backed by healthy job flows and margin expansion from further contribution of its JO (joint-operation) income. Near-term catalysts could come from accelerated contract wins from both private and public sectors.

BACKGROUND ................................................................... 5 OUTLOOK ............................................................................ 9 RISKS................................................................................. 17 FINANCIALS ...................................................................... 19 VALUATION AND RECOMMENDATION .......................... 21

Price Close

210

1,380

186

1,180

162

980

138

780

114

580 30

90

Vol m

20

10 May-14

Aug-14

Nov-14

Source: Bloomberg

52-week share price range 1,440 1,440

685.0

2,100 Current

Target

Assuming that there is no fuss from the opposition, the proposed FY15 infrastructure spending of Rp290tr which represents c.2.7% of GDP promises to create high growth for contractors, both state-owned and private. Conditions could not be more ripe as the newly minted government has shown its commitment to infrastructure development. Toll road was one industry that the government prioritised. This bodes well for NRC, as it is the only sizeable private contractor able to boast a track record in toll road development. The preoccupation of SOEs with civil works may also leave a gaping shortfall in the number of contractors working on private development

Potential target for M&A Indonesia’s investment grade status and the promise of further clarity and transparency for foreign investors in the public private partnership (PPP) scheme has made Indonesia an attractive business destination for foreign contractors. NRC, with its lengthy track record in private projects and recent toll road development, is a logical acquisition target for foreign contractors looking to make an entry in the fragmented construction industry. This could be a significant re-rating catalyst for NRC.

Catch this laggard Investors seeking to invest in a stock with the combined attributes of: 1) beneficiary of Indonesia’s infrastructure theme, 2) robust balance sheet and 3) trading at a attractive valuation should give NRC a second and third look.

Financial Summary

Relative to JCI (RHS)

1,580

Feb-14

Getting a piece of the infra action

projects (i.e. property). As a result, we think that management’s guidance of 28% growth for FY15 may be too conservative. During its heyday in 2012/13, NRC delivered 60% new contract growth p.a. History may repeat itself if all the winning cards are played.

Revenue (Rpb) Operating EBITDA (Rpb) Net Profit (Rpb) Core EPS (Rp) Core EPS Growth FD Core P/E (x) DPS (Rp) Dividend Yield EV/EBITDA (x) P/FCFE (x) Net Gearing P/BV (x) ROE % Change In Core EPS Estimates CIMB/consensus EPS (x)

Dec-12A 2,024 157.3 92.3 42.4 99.2% 33.93 0.00 0.00% 19.27 97.38 (36.7%) 11.61 41.3%

Dec-13A 3,006 272.5 171.5 73.7 73.6% 19.54 0.00 0.00% 11.01 NA (44.6%) 4.55 32.5%

Dec-14F 3,322 363.3 249.8 100.7 36.7% 14.30 17.29 1.20% 9.36 NA (17.3%) 3.60 28.1%

Dec-15F 3,901 442.7 280.6 113.1 12.3% 12.73 25.18 1.75% 7.36 17.55 (25.8%) 2.95 25.5%

Dec-16F 4,751 541.4 338.9 136.6 20.8% 10.54 28.29 1.96% 5.72 15.25 (32.2%) 2.41 25.2%

SOURCE: CIMB, COMPANY REPORTS IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Designed by Eight, Powered by EFA

Nusa Raya Cipta│Indonesia February 5, 2015

PEER COMPARISON

Research Coverage Bloomberg Code NRCA IJ TOTL IJ

Nusa Raya Cipta Total Bangun Persada

Market ID ID

Recommendation ADD ADD

Rolling P/BV (x)

Mkt Cap US$m 283 290

Price 1,440 1,075

Target Price 2,100 1,200

Upside 45.8% 11.6%

12-month Forward Rolling FD P/E (x)

9.0

35.0

8.0

30.0

7.0

25.0

6.0

5.0

20.0

4.0

15.0

3.0

10.0

2.0 5.0

1.0 0.0 Jan-10

Jan-11

Jan-12

Nusa Raya Cipta

Jan-13

0.0 Jan-10

Jan-14

Total Bangun Persada

Peer Aggregate: P/BV vs ROE

6.0

34.3%

5.0

28.6%

4.0 3.0 2.0

11.4%

1.0

5.7%

Rolling P/BV (x) (lhs)

Jan-14

Total Bangun Persada

25.0

150%

20.0

110%

22.9%

15.0

70%

17.1%

10.0

30%

5.0

-10%

0.0%

Jan-12

Jan-13

Peer Aggregate: 12-mth Fwd FD P/E vs FD EPS Growth 40.0%

Jan-11

Jan-12

Nusa Raya Cipta

7.0

0.0 Jan-10

Jan-11

Jan-13

Jan-14

0.0 Jan-10

Jan-15

ROE (See Footnote) (rhs)

-50%

Jan-11

Jan-12

Jan-13

12-mth Fwd FD P/E (x) (See Footnote) (lhs)

Jan-14

Jan-15

FD EPS Growth (See Footnote) (rhs)

Valuation


FD P/E (x) (See Footnote) Dec-13 Dec-14 Dec-15 19.54 14.30 12.73 18.82 22.92 18.71

Dec-13 4.55 4.87

P/BV (x) Dec-14 3.60 4.60

Dec-15 2.95 4.09

Dec-13 11.01 11.48

EV/EBITDA (x) Dec-14 9.36 15.29

Dec-15 7.36 11.63

Dec-15 25.5% 23.3%

Dividend Yield Dec-13 Dec-14 0.00% 1.20% 2.73% 3.19%

Dec-15 1.75% 2.62%

Growth and Returns


FD EPS Growth Dec-13 73.6% 10.9%

(See Footnote) Dec-14 Dec-15 36.7% 12.3% -17.9% 22.5%

ROE (See Footnote) Dec-13 Dec-14 32.5% 28.1% 27.7% 20.7%

SOURCE: CIMB, COMPANY REPORTS Calculations are performed using EFA™ Monthly Interpolated Annualisation and Aggregation algorithms to December year ends. NPAT/EPS values for calculations and valuations are based on recurring and normalised values for GAAP and IFRS accounting standard companies respectively.

2


BY THE NUMBERS

Share price info Share px perf. (%)

1M

3M

Relative

22.2

49.2

Absolute

23.6

54.0

Major shareholders

12M

P/BV vs ROE

12-mth Fwd FD Core P/E vs FD Core EPS

7.00

45.0%

6.00

38.6%

119.8

5.00

32.1%

% held

4.00

25.7%

3.00

19.3%

2.00

12.9%

1.00

6.4%

0.00 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

0.0%

97.7

Saratoga Investama Sedaya

7.0

Enercon Paradhya Intl PT

6.5

Jenie Roushdy Arras

4.0

Rolling P/BV (x) (lhs)

Growth 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

120% 105% 90% 75% 60% 45% 30% 15% 0%

12-mth Fwd Rolling FD Core P/E (x) (lhs)

ROE (See Footnote) (rhs)

FD Core EPS Growth (rhs)

Profit & Loss

Slower net profit growth in FY15 as it delivers the Cikampek-Palimanan toll road by Jun 2015.

(Rpb) Total Net Revenues Gross Profit Operating EBITDA Depreciation And Amortisation Operating EBIT Financial Income/(Expense) Pretax Income/(Loss) from Assoc. Non-Operating Income/(Expense) Profit Before Tax (pre-EI) Exceptional Items Pre-tax Profit Taxation Exceptional Income - post-tax Profit After Tax Minority Interests Preferred Dividends FX Gain/(Loss) - post tax Other Adjustments - post-tax Net Profit Recurring Net Profit Fully Diluted Recurring Net Profit

Dec-12A 2,028 197 157 (16) 142 1 0 14 156

Dec-13A 3,070 314 273 (40) 233 10 0 19 262

Dec-14F 3,472 452 363 (15) 348 2 0 (1) 349

Dec-15F 4,044 517 443 (46) 397 2 0 (1) 398

Dec-16F 4,906 630 541 (63) 479 5 0 (2) 481

156 (64)

262 (90)

349 (100)

398 (117)

481 (143)

92

171

250

281

339

92 92 92

171 171 171

250 250 250

281 281 281

339 339 339

Cash Flow

Free cashflow should turn positive in FY15 from better working capital management. This should be made possible as NRC’s customers will pay a larger cash advance to secure services during an upcycle. This was the case during the FY12 property boom.

(Rpb) EBITDA Cash Flow from Invt. & Assoc. Change In Working Capital (Incr)/Decr in Total Provisions Other Non-Cash (Income)/Expense Other Operating Cashflow Net Interest (Paid)/Received Tax Paid Cashflow From Operations Capex Disposals Of FAs/subsidiaries Acq. Of Subsidiaries/investments Other Investing Cashflow Cash Flow From Investing Debt Raised/(repaid) Proceeds From Issue Of Shares Shares Repurchased Dividends Paid Preferred Dividends Other Financing Cashflow Cash Flow From Financing Total Cash Generated Free Cashflow To Equity Free Cashflow To Firm

Dec-12A 157.3

Dec-13A 272.5

Dec-14F 363.3

Dec-15F 442.7

Dec-16F 541.4

(67.3)

(75.0)

(148.0)

95.3

(54.9)

2.5 (46.8) (2.5)

10.4 (60.1) (1.2)

4.6 (96.4) (1.9)

4.2 (114.2) (1.9)

6.7 (137.8) (1.9)

43.3 (34.1)

146.7 (261.4)

121.6 (270.7)

426.0 (228.1)

353.6 (132.0)

1.5 (32.5) 21.4

(8.0) (269.5) (21.4)

13.1 (257.6) 21.4

5.7 (222.5) 0.0

12.6 (119.4) 0.0

(42.9)

(62.4)

(70.1)

(0.0) (21.4) (157.5) (114.6) (134.2)

(0.0) (62.4) 141.1 203.5 205.4

(0.0) (70.1) 164.1 234.2 236.1

0.0 (0.0) 21.4 32.1 32.1 13.2

0.0 344.5 323.0 200.3 (144.2) (121.5)

SOURCE: CIMB RESEARCH, COMPANY

3


BY THE NUMBERS

Balance Sheet

The company has minimal debt and thus is not exposed to volatility risk from interest rates. This was a boon in FY13 when Indonesia’s central bank rate was hiked by 175bp.

(Rpb) Total Cash And Equivalents Total Debtors Inventories Total Other Current Assets Total Current Assets Fixed Assets Total Investments Intangible Assets Total Other Non-Current Assets Total Non-current Assets Short-term Debt Current Portion of Long-Term Debt Total Creditors Other Current Liabilities Total Current Liabilities Total Long-term Debt Hybrid Debt - Debt Component Total Other Non-Current Liabilities Total Non-current Liabilities Total Provisions Total Liabilities Shareholders' Equity Minority Interests Total Equity

Dec-12A 120 509 0 111 740 74 21 0 2 97 21 0 144 379 545 0

Dec-13A 351 895 0 60 1,305 119 198 0 3 320 0 0 322 471 793 0

Dec-14F 193 1,008 0 105 1,306 196 376 0 2 574 21 0 362 447 830 0

Dec-15F 334 988 0 141 1,464 305 450 0 2 757 21 0 423 502 946 0

Dec-16F 498 1,231 0 145 1,875 374 450 0 2 826 21 0 513 611 1,145 0

0 0 23 568 270 0 270

19 19 27 840 786 0 786

19 19 39 888 992 0 992

19 19 44 1,010 1,211 0 1,211

19 19 57 1,221 1,479 0 1,479

Dec-12A 28.0% 50.3% 7.8% 45.5 124.0 56.6 40.9% NA 33.31 33.36 94.6% 56.7%

Dec-13A 48.5% 73.2% 9.1% 141.3 316.7 187.5 34.5% NA 32.73 28.76 88.4% 43.3%

Dec-14F 10.5% 33.3% 10.9% 69.2 400.2 185.6 28.5% 17.2% 36.62 38.65 87.9% 37.8%

Dec-15F 17.4% 21.9% 11.3% 126.1 488.1 211.6 29.4% 22.3% 29.61 37.78 55.7% 34.4%

Dec-16F 21.8% 22.3% 11.4% 192.3 596.5 255.2 29.6% 20.7% 30.27 37.24 65.8% 34.3%

Dec-12A 1,530 (2,024) 2,783 N/A N/A N/A N/A N/A N/A

Dec-13A 2,289 (3,445) 4,600 N/A N/A N/A N/A N/A N/A

Dec-14F 3,445 (3,322) 3,200 N/A N/A N/A N/A N/A N/A



Key Ratios

Revenue growth should pick up in FY16 as the company’s new contract signing is projected to grow at a faster pace of 30%, relative to the decline in FY14 (largely due to saved projects in the pipeline as developers wait for uncertainties risk from the election year to subside).

Revenue Growth Operating EBITDA Growth Operating EBITDA Margin Net Cash Per Share (Rp) BVPS (Rp) Gross Interest Cover Effective Tax Rate Net Dividend Payout Ratio Accounts Receivables Days Inventory Days Accounts Payables Days ROIC (%) ROCE (%)

Key Drivers

Assuming 60% new contract growth in FY15 (similar to growth seen during its heyday in FY12/13) instead of the tepid 28% growth guided by the company, FY15 new contracts should reach Rp5.1tr (excluding JO projects).

(Rpb) Outstanding Orderbook Order Book Depletion Orderbook Replenishment ASP (% chg, main prod./serv.) Unit sales grth (%, main prod./serv.) Util. rate (%, main prod./serv.) ASP (% chg, 2ndary prod./serv.) Unit sales grth (%,2ndary prod/serv) Util. rate (%, 2ndary prod/serv)

SOURCE: CIMB RESEARCH, COMPANY

4


Smelling the roses BACKGROUND Company background

‘‘

Demand for property particularly in Greater Jakarta area should continue to be strong in FY15 on the back of improving infrastructure. There will be MRT, outer ring road, new TransJakarta bus routes, and the six inner city toll road schedule to be completed in the next five years. Amran Nukman, Chairman of Real Estate Indonesia

Nusa Raya Cipta (NRC) was founded in 1975 by Ir. Benjamin Arman Suriadjaya (who is related to Astra's founder, William Suriadjaya) and Ir. Marseno Wirjosaputro. With more than four decades of construction experience, NRC has built a solid reputation. NRC has worked with some of the largest Indonesian property developers including Ciputra, Lippo Karawaci, Alam Sutera, Agung Podomoro and Metropolitan Land. NRC has built some of the most high-profile five-star hotels in Indonesia including the Ayana Resort and Bvlgary hotel, which are held by its sister company PT Suryalaya Anindita International (SAS). Such premium commercial properties add cachet to NRC's status as one of the few Grade-A contractors that are capable of delivering quality on a timely basis.

Figure 1: Total project value by repeat clients with Agung Podomoro at the head of the herd

Figure 2: Top 3 lead clients for NRC are property developers: Agung Podomoro, Ciputra, and Pikko

Alam Sutera

Alam Sutera

Astra International

Astra International

Carrefour Indonesia

Carrefour Indonesia

GKD

GKD

Bvlgari

Bvlgari

Cerestar

Cerestar

Nestle

Title: Source:

Please fill in the values above to have them entered in your rep

Nestle

Mayapada

Mayapada

Ayana

Ayana

Duta Pertiwi (Sinar Mas)

Duta Pertiwi (Sinar Mas)

Musim Mas

Musim Mas

Pikko

Pikko

SSI

SSI

Ciputra

Ciputra

Agung Podomoro

Agung Podomoro 0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

0.0

SOURCES: CIMB, COMPANY REPORTS

Figure 3: Ayana Resort and Spa, Bali


50.0

100.0

150.0

200.0

250.0

300.0


Figure 4: Alam Sutera Shopping Mall, Serpong


5

Figure 5: Thamrin Nine Office, CBD Jakarta



NRC decided to capitalise on Indonesia’s booming infrastructure sector by branching out from its core commercial building construction specialty to civil construction in 2012. The company undertook two civil projects in FY12 – the construction of the Merak toll road and a jetty under the Tangerang reconstruction project. It is currently also building the Cikampek-Palimanan toll road which is scheduled to be completed by 1H15. NRC also has business units specialising in industrial development like factories and mills. Foreign direct investment in Indonesia has risen by a rapid CAGR of 47% over FY09-12 or 8.2x Indonesia’s 2013 GDP of 5.7%. The price of industrial land has increased correspondingly, particularly from FY10 onwards, after 10 years of stagnation. We think that NRC’s affiliation with SSIA will bring industrial-related job flows in the coming years. This will provide sustainable growth from another area of construction. Figure 6: Tangerang-Merak toll road reconstruction

Figure 7: Construction of jetty


Figure 8: Cikampek – Palimanan toll road, longest section of Trans Java toll road



Figure 9: Historical milestones Year Milestone Established as a construction company with name of National Roadbuilders & Construction Co., working 1968 on large-scale early projects of Sumatra Province road spanning ±145km throughout Sumatra, and Juanda airport in Surabaya. 1975

PT National Roadbuilders & Construction Co established a new company named PT Nusa Raya Cipta (NRCA)

1994 Acquired by Surya Semesta Internusa Group, a well known property conglomerate

1997

Complete construction of Melia complex (5-star hotel, office and apartment) in Kuningan, Jakarta (CBD area).

1998

Obtained ISO 9002:1994 (Quality Systems). Complete construction of Musi Pulp Mill Townsite in Muara Enim, valued at USD$17.4mn, pushing the company forward pas the national economic crisis.

2003 Obtained ISO 9001:2000 (Quality Management Sytems).

2009

Obtained ISO 9001:2008 (Quality Management Systems) and Occupational Safety and Health Management (SMK3) certification by the Department of Manpower and Transmigration

2011 Awarded as Pioneer of Commercial Building Development by the Indonesian Contractor Association.

2012 Diversification into infrastructure business. Appointed construction of Cikampek-Palimanan Toll Road.

2013 Listed in Indonesian Stock Exchange with ticker name NRCA. SOURCES: CIMB, COMPANY REPORTS

6


Company shareholders The biggest shareholder of Nusa Raya Cipta is PT Surya Semesta Internusa Tbk (SSIA), whose founder is Benjamin Arman Suriadjaya. He is the younger brother of the late William Soeryadjaya, who founded and owned Astra International up until 1992. Later, Edwin Soeryadjaya, William’s son, founded Saratoga Capital – a private-equity firm that owns various business including Adaro and a stake in the Cikampek-Palimanan toll road concession. SSIA is now headed by Johannes Suriadjaja, son of Benjamin Suriadjaya, and CEO since 2001. SSIA is an industrial property developer that also operates and owns a couple of commercial assets (office towers and hotels). Thus far, NRC has been able to capitalise on SSIA’s exposure to the industry players as the revenue contribution from warehouses or industrial building construction works represents more than 20% of its revenue as in the last four years (2010-14). The second largest shareholder of NRC is PT Saratoga Investama Sedaya Tbk (SRTG). PT Saratoga Investama Sedaya has three core holdings in its business portfolio: 1) consumer, 2) infrastructure, and 3) natural resources. Saratoga Investama Sedaya Tbk also owned c.25% of PT Lintas Marga Sedaya (concession holder of the Cikampek-Palimanan toll road; the longest section in the Trans Java toll road). There may be other toll road investments in which the group may invest in the future, going by its philosophy of focusing on key sectors of the Indonesian economy. Figure 10: Shareholders of NRC Shareholders

%

PT Surya Semesta Internusa Tbk (SSIA) Group PT Saratoga Investama Sedaya Tbk (SRTG) Management

67.2 7.0 7.4

Others (