Equity Strategy Going for growth and low leverage

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1 Equity Strategy Going for growth and low leverage JANUARY 30, 2014 Expect macro to stabilize, index target of 5,120 We remain optimistic on equity market with index target of 5,120 as current valuation at 13.4x forward PE is pricing in the possibility of a recession versus our belief that economic growth will only slow down. We expect earnings growth of 12% for market and potential re-rating to 14.0x PE by 2H, which is still below long-term historical average PE of 15.2x. Our top sector pick is construction (WIKA and PTPP) and we advise investors to be selective in other sectors: GGRM, TAXI, JPFA, and NIPS in consumer, BBRI and BBTN in banks, BSDE and MTLA in property, ITMG and UNTR in coal. What style works for every situation? We examined investment styles that work during election year (2004) and high interest rate environment (2006). The key takeaway is both growth and low gearing outperformed the market in both situations. We have compiled two lists of stocks that we have a Buy recommendation with expected earnings growth that can beat the market in 2014 and those that have low gearing, specified by net Debt to EBITDA at 0.5x or lower. Macro situation is likely to improve, election is less of a factor We expect CA deficit to improve from 3.8% in 3Q 2013 to below 3% by 2H, primarily due to the economy slowing down, which reduces non-oil and gas imports. There is upside to our number if the government reduces fuel subsidy, which is not our base case assumption. We also believe that election is not a major factor (albeit may cause short-term fluctuation) since whoever will become the president is unlikely to have majority party support in the parliament, which we expect to be split with the largest parties only winning ~20% of the seats. STRATEGY UPDATE Index Target : 5,120 Key takeaways from Trimegah investor forum During Trimegah annual investor forum yesterday, we invited three experts on macro, retail, and property to share their views. In summary, eliminating fuel subsidy and investment in supply side of the economy are necessary to improve CA deficit in the long-term, there is still plenty of growth left for retail sector, and medium/long-term outlook for residential property remain robust. Sebastian Tobing sebastian.tobing@trimegah.com Frederick Daniel frederick.daniel@trimegah.com Robby Hafil robby.hafil@trimegah.com Maria Renata maria.renata@trimegah.com Melvina Wildasari melvina.wildasari@trimegah.com PT Trimegah Securities Tbk - EQUITY STRATEGY 1

2 Domestic macro conditions are improving Expectations on global macro conditions are likely to remain volatile, with US tapering and a slow-down in China to remain in focus, but we are optimistic that domestic macro conditions will improve, particularly on current account deficit, which is important for Rupiah stability. We expect current account deficit to fall from 3.8% in 3Q to below 3% by 2H this year. The risk is if oil price jumps significantly, which may happen if the middle east becomes unstable (which is not our base assumption). How much further will BI rate rise? Well, BI may not need to We believe BI has already moved ahead of core inflation when it raised rates by 175bps in 2H13. Currently the spread is at 2.5%, above the +1 standard deviation of 2.3%. We expect core inflation to rise, but not higher than 5.5% (currently at 5.0%). Assuming BI rate stays at 7.5%, this implies the spread may potentially move to 2.0%, which is still higher than the historical average of 1.9%. We still assume BI will raise rate by another 25bps to 7.75% and maintain it at that level but we think this is already priced in by the market (consensus expects rate to rise to %). We believe that BI rate is very unlikely to rise further than 8.0% as the economy may overshoot on the way down as it is already on a weakening trend., CEIC, Bloomberg BI has also tightened the economy in other ways In addition to the 175bps increase in BI rate in 2H13, BI has also urged banks to be more cautious in dispensing loans. The impact is already visible, as BI s survey of banks indicate expectation of new loans to fall significantly in 1Q 2014 (albeit still growing YoY) and as mortgage (landed house and apartments) loan growth has stagnated at end of 2013 after LTV (loan to value) regulations were tightened. Source: BI (Bank Indonesia) 2 EQUITY STRATEGY PT Trimegah Securities Tbk -

3 Signs of slow-down, expect GDP growth of 5.1% in 2014 We expect GDP growth to slow down from 5.6% in 2013 to 5.1% in 2014, due to a combination of depreciated Rupiah and BI s efforts to slow down the economy. This is a healthy and a necessary slow-down, as government has been reluctant to reduce fuel subsidy (which is the long-term solution to improve current account deficit). There have been signs of slow-down, mainly in slowing growth in cement and auto sales (albeit motorcycle sales growth is still accelerating)., CEIC, Bloomberg, CEIC, Bloomberg More optimistic on CA deficit improvement Trade balance has shifted to a USD775m surplus in November on account of improving non-oil and gas exports and significantly lower non-oil and gas imports. We expect CA deficit to improve from 3.8% in 3Q 2013 to around 3.5% in 4Q 2013 and to stabilize below 3.0% by 2H We expect slowing imports to be the main driver of the improvement in trade balance and CA deficit. We would be more bullish if government decides to eliminate or at least apply a fixed fuel subsidy system (which is not our base case assumption for 2014). PT Trimegah Securities Tbk - EQUITY STRATEGY 3

4 Source: Trimegah, CEIC, Bloomberg Product group 12-Nov 13-Oct 13-Nov YoY MoM change Reactors, Boilers, Machinery & Mechanical Appliance (84) % 2.00% 48.6 Electrical Machinery and Equipments; Sound Recorders (85) % 0.50% 7.6 Plastics and Articles Thereof (39) % % -79 Iron and Steel (72) % % Organic Chemicals (29) % % Vehicles Other Than Railway/Tramway, Parts and Accessory (87) % % Cereals (10) % % Articles of Iro and Steel (73) % % Cotton (52) % -8.50% -20 Residues and Waste From The Food Industries (23) % % Source: BPS 12-Nov 13-Oct 13-Nov YoY MoM change Animal or Vegetable Oils/Fats and Processed Products (15) % 41.60% Mineral Fuels, Mineral Oils and Products of Distillation (27) % 14.70% Electrical Machinery and Equipments; Sound Recorders (85) % % Rubber and Articles Thereof (40) % -8.10% Ores, Slag, and Ash (26) % 9.40% 60 Nuclear Reactors, Boilers, Machinery & Mechanical Appliance (84) % -5.40% Vehicles Other Than Railway/Tramway, Parts and Accessory (87) % % Footwear, Gaiters and the Like; Parts of Such Articles (64) % 5.00% 16 Article of Apparel & Cloth Accessory,NotKnitted/Crochet (62) % -9.00% Plastics and Articles Thereof (39) % 4.70% 11.1 Source: BPS 4 EQUITY STRATEGY PT Trimegah Securities Tbk -

5 Rupiah is likely to stabilize at Rp12,000 level by year-end As CA deficit improves to below 3.0% level of GDP, we expect Rupiah to also stabilize to Rp12,000 level. We believe stability in CA deficit and Rupiah is more important than economic growth. Once the market is convinced of the macro stability, equity market should re-rate. Source: Bloomberg 2014E 2015E GDP Headline Inflation Rupiah/US$ (Rp/US$) eop 12,000 11,500 BI Rate eop yr Indo Govt bond avg yr Indo Govt bond eop Oil Price - Brent (US$/barrel) Coal Price (US$/ton) CPO Price (RM/ton) 2,700 2,600 JCI EPS Growth JCI Index 5,120 5,800 PT Trimegah Securities Tbk - EQUITY STRATEGY 5

6 What is the risk of bank failure? There is very little risk of a failure at one of the big banks, but liquidity at the smaller banks needs to be monitored as even a small bank failure is a systemic risk. We analyzed small banks and comforted by the fact that most of them have NPL below 5.0%. There are only two banks that could be of a concern, but noted that the NPL trend of those two banks is at least improving. was 8.2% in 1Q was 8.1% in 1Q, BI (Bank Indonesia) Equity valuation is attractive At 13.4x forward PE, we believe that index is reasonably valued as it is at a 12% discount to average historical PE of 15.2x. We expect earnings growth to slow down from 16% in 2013 to 12% in 2014 as we have reduced earnings estimates at many of the companies under our coverage. Our index target is 5,120, implying a PE rerating to 14.0x, which we believe will be driven by stability in CA deficit and Rupiah., Bloomberg 6 EQUITY STRATEGY PT Trimegah Securities Tbk -

7 Buy growth and low geared companies When we examined styles that worked during election year (2004) and high interest-rate environment (2006), we found that growth and low geared investment styles always worked. We have prepared a list of stocks with earnings growth higher than the index and list of stocks with low leverage (that we have Buys on). Source: Trimegah, Bloomberg Source: Trimegah, Bloomberg PT Trimegah Securities Tbk - EQUITY STRATEGY 7

8 17-Jan-14 (Rpbn) Target SGRO 1,865 3,497 Buy 2, SIMP ,467 Buy 1, LSIP 1,725 12,179 Buy 2, ARNA 790 5,836 Buy MTLA 395 3,183 Buy TELE 695 3,808 Buy JSMR 5,350 36,210 Buy 8, GJTL 1,930 6,621 Buy 2, PTPP 1,340 6,319 Buy 1, MPPA 1,880 10,111 Buy 2, WIKA 1,955 11,758 Buy 2, WSKT 555 5,298 Buy UNTR 19,300 78,146 Buy 24, AUTO 3,390 16,339 Buy 4, HRUM 2,450 6,948 Buy 3, ERAA 1,185 3,480 Buy 3, TOTL 685 2,336 Buy ADHI 1,745 3,251 Buy 2, SMCB 2,315 17,740 Buy 2, GGRM 44,625 86,247 Buy 54, ASII 6, ,288 Buy 8, INTP 21,125 78,318 Buy 26, Price Market cap Rec Price Upside PE EPS growth 17-Jan-14 (Rpbn) to JCI Target LSIP 1,725 12, Buy 2, TELE 695 3, Buy PTPP 1,340 6, Buy 1, MPPA 1,880 10,111 Buy 2, GGRM 44,625 86, Buy 54, INTP 21,125 78, Buy 26, CPIN 3,995 66, Buy 4, EQUITY STRATEGY PT Trimegah Securities Tbk -

9 Foreign investors slowly returning After 8 months of outflow, we are finally seeing net buy this month. We believe this is an indication that investors are starting to believe in improving macro conditions (or at least stabilizing) and forward looking investors see there is plenty of value at current market valuation. We also highlight that foreign investors bond ownership remain stable at 33% and more importantly, foreign investors now own more medium and long maturity of Indonesian government bonds compared to end of This implies that foreign investors remain confident in Indonesia s long-term economic outlook. Source: Bloomberg Source : Ministry Of Finance PT Trimegah Securities Tbk - EQUITY STRATEGY 9

10 Sector picks: Construction as top pick We like construction sector the most as we remain confident in construction growth driven by infrastructure projects. Our top picks within the sector are WIKA and PTPP. We have Neutrals on banks, property, consumer, and coal but we think there are selective Buy opportunities within each sector. We like BBRI the most among banks, BSDE and MTLA among property sector, GGRM, TAXI, JPFA, and NIPS within consumer sector, ITMG and UNTR within coal sector. Price TP Upside Rec M Cap (Rptr) EPS 14 (Rp) P/E 14 PEG 14 OB/EV 14 Market cap/ob (X) 14 (x) ADHI 1,745 2, % Buy (x) WIKA 1,955 2, % Buy PTPP 1,340 1, % Buy WSKT % Buy Construction Sector TICKER Price (Rp.) Mkt. Cap TARGET Ups/Down P/E (X) EPS g Div. Yield 17-Jan-14 (Rpbn) Rec Price MPPA 1,880 10,111 Buy 2, GGRM 44,625 86,247 Buy 54, TAXI 1,665 3,551 Buy 1, NIPS Buy ASII 6, ,288 Buy 8, AUTO 3,390 16,339 Buy 4, ACES ,777 Hold RALS 1,270 8,764 Hold 1, AMRT ,912 Buy KLBF 1,410 66,094 Hold 1, ROTI 1,080 5,568 Buy 1, GJTL 1,930 6,621 Buy 2, Price TPUpside Rec M Cap (Rptr) EPS 13 EPS 14 EPS G PE 14 PBV 14 ROE 14 BMRI 8,750 9, Hold BBRI 8,325 10, Buy BBCA 9,900 9,800-1 Hold BBNI 4,275 5, Buy BDMN 4,125 4,250 3 Hold BBTN 935 1, Buy BJBR 835 1, Buy BTPN 4,500 4, Hold Banking Sector EQUITY STRATEGY PT Trimegah Securities Tbk -

11 Picks Price Rec. TP (Rp) Upside Div. Yield Total Return EPS Growth PEG (x) PE (x) 2014 Marketing Sales Growth Discount to NAV SMRA 900 HOLD BSDE 1,455 BUY 1, ASRI 520 HOLD APLN 225 HOLD MDLN 409 HOLD MTLA 395 BUY BEST 458 HOLD SSIA 670 HOLD KIJA 201 HOLD Property Sector ADRO BUMI BYAN HRUM ITMG PTBA UNTR Sector price (Rp) ,700 2,450 25,125 9,475 19,300 na target price (Rp) 1, ,800 3,600 32,000 12,000 24,000 na upside dividend yield total return recommendation BUY HOLD SELL BUY BUY BUY BUY Neutral resources (mn tons) 4,700 10, ,596 1,790 19,809 reserves (mn tons) 921 2, ,547 prod volumes (mn tons) sales volumes (mn tons) sales volumes growth EV/share (Rp) 1,836 2,314 10,703 1,663 21,734 6,149 21,146 na EV/reserve (USD/ton) EV/EBITDA (x) PE (x) 12.5 neg neg EPS growth na na PEG (x) na na na 0.6 na na PBV (x) 1 neg gross profit margin EBITDA margin EBIT margin net margin ROE 7.8 neg ROA 3.3 neg PT Trimegah Securities Tbk - EQUITY STRATEGY 11

12 Takeaways from panel discussion with three experts We had a discussion with three experts in our investor forum: Raden Pardede (macro), Anton Sitorus (property), and Yongky Susilo (retail). In summary, Raden Pardede highlights that government needs to come up with a longterm solution to CA deficit, with the obvious one being elimination or at least reduction of fuel subsidy. Yongky Susilo remains optimistic on retail sales growth, while Anton Sitorus is cautious in the near-term (albeit he does not expect a property price meltdown, only slowing growth) but remain optimistic in property price and demand outlook in the medium and long term. Raden Pardede BI s current effort to slow-down the economy is a short-term solution to CA deficit problem. Government should focus on improving the supply side: infrastructure, health, education. The obvious solution that government has been reluctant to do is eliminating fuel subsidy. Estimates that fuel subsidy cost could rise by approximately Rp100tr if Rupiah stays at current level. Government needs to make the hard decision to eliminate subsidy and re-allocate the subsidy to sectors (such as infrastructure) that could boost export in order to improve CA deficit for the long-term. Yongky Susilo Remain optimistic in retail growth. Last year retail grew by 11%, expect it to grow by 13% this year. Retail will not be affected much by elections. The trend is retail is expansion into smaller cities. Customers in cities such as Cirebon are becoming more sophisticated and demand lifestyle products just like in large urban areas such as Jakarta. Plenty of foreign investors appetite to enter Indonesia s consumer market. Modern retail only contributes about 20% of total retail sales, implying plenty of growth potential. Anton Sitorus Still bullish on residential price outlook in the medium term Elections likely to dampen demand in the near term Foreign appetite into Indonesia only affects office and industrial. Residential is much less affected as mostly bought by domestic investors. LTV regulation has had negative impact on property demand, but BI rate much less so. Mortgage rate needs to rise to at least 13% (currently around 10%) before it becomes a negative factor for property market. 12 EQUITY STRATEGY PT Trimegah Securities Tbk -

13 PT Trimegah Securities Tbk Gedung Artha Graha 18 th Floor Jl. Jend. Sudirman Kav Jakarta 12190, Indonesia t f DISCLAIMER: This report has been prepared by PT Trimegah Securities Tbk on behalf of itself and its affiliated companies and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. This report has been produced independently and the forecasts, opinions and expectations contained herein are entirely those of Trimegah Securities. While all reasonable care has been taken to ensure that information contained herein is not untrue or misleading at the time of publication, Trimegah Securities makes no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided solely for the information of clients of Trimegah Securities who are expected to make their own investment decisions without reliance on this report. Neither Trimegah Securities nor any officer or employee of Trimegah Securities accept any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. Trimegah Securities and/or persons connected with it may have acted upon or used the information herein contained, or the research or analysis on which it is based, before publication. Trimegah Securities may in future participate in an offering of the company s equity securities. PT Trimegah Securities Tbk - EQUITY STRATEGY 13