Year of misery for state-owned construction firms
This article has been translated by PwC Indonesia as part of our Indonesia Infrastructure News Service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.
Bisnis Indonesia - Warsa nestapa BUMN karya
21 August 2024
By Dionisio Damara
Bisnis, Jakarta - State-Owned Enterprises (SOEs) in the construction sector are preparing anticipatory measures to face the risk of a reduced infrastructure budget in the fiscal posture for the coming year. These steps include business diversification and maximising non-government projects.
According to the Financial Note and the Draft State Budget (RAPBN) for 2025, the government has allocated a budget of Rp400.3 billion for the infrastructure sector.
Some of the government’s construction targets include vertical public housing, toll roads, dams, irrigation networks, and providing internet access.
Although still somewhat expansive, the infrastructure budget allocation in the next fiscal year remains lower than this year's allocation, which reaches Rp423.4 trillion.
Several state-owned construction enterprises are increasingly apprehensive about the implications of the reduced budget allocation. Consequently, diversification is essential to sustain company performance.
Rozi Sparta, Corporate Secretary of PT Adhi Karya (Persero) Tbk (ADHI), stated that the reduction in the infrastructure budget affects the company's portfolio, as government-sourced projects have been quite dominant throughout this year.
However, ADHI has anticipated this budget reduction by targeting other project segments from other SOEs, regional SOEs, the private sector, and public-private partnership (PPP) projects through creative funding.
"The company will maximise its portfolio of non-government projects to anticipate the reduced budget in 2025," he said to Bisnis on Tuesday (20/8).
In addition, ADHI will focus on infrastructure and building projects in the private sector selectively. This measure is expected to maintain business performance in 2025.
" Along with the progress of the government's development agenda, the company will explore opportunities to participate through investment, ensuring a measured risk assessment," he explained.
Mahendra Vijaya, Corporate Secretary of PT Wijaya Karya (Persero) Tbk (WIKA), stated that the company is still observing and awaiting the 2025 State Budget Law to be enforced by the government.
On the other hand, WIKA is considered to have sufficiently diversified business competencies. Mahendra stated that, besides infrastructure and buildings, the company has strengths in other segments such as EPC, manufacturing, and property.
"This is expected to become a revenue contributor in the future, while still maintaining competence in infrastructure, which has been WIKA's main business," he said.
Separately contacted, Associate Director of the BUMN Research Group at the Management Institute of the Faculty of Economics and Business of Universitas Indonesia (UI), Toto Pranoto, stated that the infrastructure budget in RAPBN 2025 remains quite substantial.
However, he believes that the important point is how effectively the projects can be implemented. This is especially related to infrastructure development in the education and health sectors as the priorities.
"Can President Prabowo's administration promptly execute projects in the first year? Certainly, this requires attention," he said.
He noted that 2025 will be a transitional period for Prabowo Subianto's administration, so the focus on real economic development still needs to be proven.
In these circumstances, Toto views that state-owned construction enterprises need to diversify their markets fast to ensure business sustainability going forward.
"It would be better if state-owned construction enterprises start diversifying their markets quickly. This way, they will not rely too much on government projects, ensuring the sustainability of the company," he explained.
Stock prospects
Despite being lower than this year, the infrastructure budget allocation in RAPBN 2025 is still considered quite substantial, serving as a positive catalyst for cement issuers and state-owned construction enterprises.
Kiwoom Securities analyst Miftahul Khaer views the 2025 infrastructure budget draft as a potential positive catalyst for the stocks of state-owned construction enterprises and cement companies, as it could drive fundamental performance.
"Although the budget allocation is lower than the previous period, we believe it is still quite substantial. This is certainly an interesting indication for construction and cement producer stocks," he said.
Currently, Miftahul stated that most state-owned construction enterprises are still struggling to improve financial performance. Therefore, the infrastructure budget posture could have a positive impact.
"Even so, we recommend a wait-and-see approach while waiting for a performance turnaround momentum in the construction segment," he said.
On the other hand, cement issuers have better opportunities and performance. This condition leads Kiwoom to recommend a trading buy for PT Semen Indonesia (Persero) Tbk. (SMGR) with a nearest target price of Rp4,240. Miftahul stated that the outlook for cement issuers in the second half of 2024 is still supported by increased demand from large-scale projects.
Senior Investment Information at Mirae Asset Sekuritas, Nafan Aji Gusta, revealed that WIKA shares currently stand as one of the leaders in the construction sector from a benchmark perspective.
According to data from the Indonesia Stock Exchange (IDX), WIKA shares were at Rp332 per share as of Tuesday (20/8). This price reflects a 62.81% increase year-to-date (YtD) and a 145.93% surge over the past three months.
Other stocks in the improving sector include ADHI and PT PP (Persero) Tbk (PTPP). ADHI shares are currently priced at Rp296 per share, up 33.33% in the last three months, while PTPP strengthened by 17.39% to Rp432 over the same period.
"The most important thing is that [state-owned construction] issuers can maintain the performance of new contracts, thus becoming a positive catalyst for improving fundamental performance. However, the challenge is how each issuer can reduce negative cash flows," said Nafan.
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