Wed, 24 Jun 2015

Have Indonesia’s construction stocks lost their lustre? For the past two years, many of the country’s listed construction companies — often referred to as “the Karyas” or “the Works” — have soared on a seemingly endless bull run.

Investor appetite for construction stocks has been particularly fired up since the inauguration of President Joko Widodo, universally known as Jokowi, in October 2014 because he has prioritised developing infrastructure such as ports, airports and roads across the sprawling archipelago to boost economic growth.

The new administration freed up billions of dollars by slashing fuel subsidies late last year to finance its ambitious infrastructure build-out.

However, construction stocks have suffered a bruising sell-off in recent weeks, in line with the Indonesian stock exchange (JCI), which is down 5.4 per cent year to date in local currency and 11.98 per cent in US dollar terms.

A weaker outlook for gross domestic product growth is one reason. But another is slow progress on government spending because of endless budget revisions and lingering political uncertainties.

Speculation is rife that Mr Widodo will reshuffle his cabinet in August — he has already removed the head of the state food procurement agency — which could lead to a shift in priorities.

Despite the bumpy start to his time in office, Mr Widodo still has a lot of popular support. And many senior figures in Jakarta’s business community expect the state-owned construction companies to push ahead with spending on infrastructure projects in the second half of the year.

A number of projects have been formally “launched” over the past few months, including a Trans-Sumatra toll road, a plan to develop 24 seaports and an ambitious power plant programme.

There have also been a flurry of investments in mine-mouth power plants, smelters and ports, according to FT Confidential Research, a Financial Times research service. Indonesian construction stocks

Mr Widodo’s mandate hangs on pushing ahead with his infrastructure buildout in the next few months.

Signs of progress could lead to another rally in construction stocks — many of which have price-to-earnings ratios of near 30 — regardless of the performance of the broader index.

“Construction stocks are pricey but less expensive than popular blue-chip stocks like Unilever Indonesia, Kalbe Farma and Mitra Adiperkasa,” said one Jakarta-based fund manager.

“The scope for future earnings potential is huge”.

Such optimism is indicative of the kind of speculation common in Southeast Asian stock markets. Thailand's construction stocks

In neighbouring Thailand, for example, investors piled into Bangkok-listed construction stocks in 2010 after the introduction of an “infrastructure bill” by the administration of former prime minister Yingluck Shinawatra.

But the surge was shortlived and a military coup removed Ms Yingluck from office in May 2014. However, under the Thailand’s military-led government, the bull run has resumed after a revival of big-ticket infrastructure plans.

Investors in Indonesia’s construction stocks may have to get used to a bumpy ride.