Indonesia Market Ou2H17 Make Best Use of Momentum

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1 NH Korindo Research NH 해외주식 NH Korindo 인도네시아 Research October 2018 Indonesia Market Ou2H17 Make Best Use of Momentum Summary: In September Indonesia s stock market failed to uphold its two-back-to-back rally in July and August as JCI waned by 1% to 5, Despite the failure, Indonesia s financial market circumstances in September improved significantly. The rupiah was successful stable at the range of 14,800-14,950 and the bonds market rallied on the back of the decline of more than 50 bps in yields of the government bonds. The shrugging off concern about the global trade war and the Fed s stance of monetary tightening were the logical takeaways for a conducive trading territory. In October, Indonesia Stock Exchange (IDX) likely posts a significant rally. The lessening global pressure and the expectancy of recovery in forex reserves underpin JCI s movement. JCI waning in September widens valuation rooms for rally until the end of Within the last 3 months, the trend of massive foreign net sell ceased away. JCI s consistent average hike of 2.2% since October 2012 likely ensures foreign investors to post a significant net buy. We recommend ANTM, INDF, and BBRI as top pick stocks in October. 1

2 Market Recap September 2018 JCI : 5, (-0.70%) USDIDR : 14,903 (+1.31%) 10-year Government Bond Yield : 8.115% (-8.7 bps) Significant Factors Affecting Market in September 2018 : 1. Fears of the U.S. New Import Tariffs 2. Subdued jitters of trade war between the U.S. and China Jakarta Composite Index Aug - Sep 2018 USDIDR & Government Bond Yield Aug - Sep

3 Declining Forex Reserves Promptly Halted In August 2018, Indonesia posted the forex reserves of USD117.9 billion. The figures were lower than July s forex reserves of USD118.3 billion in July and the lowest figures since January The decline of USD400 million in August s forex reserves was lower than the decline of around USD1.1 billion-usd3.9 billion per month from February to July We estimate that the trend of downbeat forex reserves virtually reached its climax. From February to November 2015, forex reserves depleted by USD15.3 billion amid the climax of the rupiah depreciation settling at 14,691 per the U.S. dollar. Now, forex reserves have rooms for whittling away after posting the decline of USD14.1 billion and reaching the highest figures in January Forex Reserve & USDIDR Sep Aug 2018 Forex Reserve & 10-year Government Bond Yield Source: Bank Indonesia, Bloomberg, NH Korindo Research Source: Bank Indonesia, Bloomberg, NH Korindo Research 3

4 Pressure Deriving from Export Anomaly August s trade balance posted the deficit of USD1.02 billion lower than July s deficit of USD2.01 billion. August s total export depleted by 2.6% m-m. The decline in August s export was an anomaly because on monthly basis, August s export consistently hiked as of The downturn in August s export was attributable to the decline in export volumes instead of the decline in prices of exported goods. August s total imports edged down by 7.8% m-m to USD16.8 billion. The lowering imports were attributable to the downturn in the average prices of imported goods from USD1,178 per ton in July to USD1,082 per ton in August. On the other side, August s import volumes nudged up 0.16% m-m to 15.6 million tons. Trade Balance (USD mn) Sep Aug 2018 Export Volume ( 000 tons) and Export Avg. Price (USD/ton) Source: Indonesia Statistics, Bloomberg, NH Korindo Research Source: Bank Indonesia, Bloomberg, NH Korindo Research 4

5 Consistent Trend of Core Inflation In August, Indonesia posted the deflation of 0.05% m-m. Meanwhile, August s inflation was lower than July s inflation of 0.28% m-m alining with the monthly cycle. August s core inflation of 2.90% y-y increasing than July s core inflation of 2.87%. The trend of core inflation rose further since February The acceleration in July and August s core inflation signed that the trend of recovery in domestic consumption continued further albeit the ending of Idul Fitri. Monthly Inflation Jun Aug 2018 Annual Headline and Core Inflation Aug Aug 2018 Source: Indonesia Statistics, Bloomberg, NH Korindo Research Source: Indonesia Statistics, Bloomberg, NH Korindo Research 5

6 Rupiah Beginning to Be Stable The rupiah recovered in September as it was capable to settle at the range of 14,800-14,950 in stark contrast to its depreciation in August. In August the rupiah was hardly stable despite the U.S. dollar depreciation. In September, the U.S dollar depreciated further resulted in the stable rupiah. The stable rupiah aligned with other emerging economies currencies appreciation; the Turkish lira was capable of being appreciated in August after a steep depreciation in August, for example. The Argentina peso, dissimilar from the rupiah and the Turkish lira, remains to be depreciated further due to worse internal circumstances compared to its emerging economies peers. USDIDR & Dollar Index Selected Currencies Depreciation against USD 6

7 Rally in Government s Bonds Shrugging Off Concerns about the Fed The stable rupiah caused Indonesia s government bonds to rally. After reaching its highest position of 8.623% on September 5 th, yields of 10-year government bonds consistently waned further to 8%. The decline of 50 bps in Indonesia s government was in a stark contrast to the hike of 3%-3.1% in yields of the U.S. government bonds. The figures topped the psychological threshold and signalled that the jitters of monetary tightening sending yields of the U.S. government bonds to soar gave no significant impacts on Indonesi a s markets. The consistent decline in yields of Indonesia s government bonds was also coupled with the trend of net buy by foreign investors since the mid of September. Indonesia and US 10 year Gov t Bond Yield Foreign Net Buy (IDR tn) in Indonesia Government Bond 7

8 BI s Effective Policy In September 2018, BI raised BI 7-Day Reverse Repo Rate by 25 bps to 5.75%, the highest since May It was the fifth rates hike in 2018; BI has raised its benchmark rate by 150 bps since May In 2013 when the global volatility occurred, BI raised its benchmark rates by 175 bps from 5.75% to 7.50%. Meanwhile, BI has raised its benchmark rates by 150 bps in The trend of stable rupiah starting in September 2018 underpinned by the shrugging off global concern about the U.S. and China trade war and the Fed s rate hike in December causes BI to face less intense pressure on re-raising its rate until the end of However, to rejuvenate the domestic financial market, BI likely raises its rate once more at the end of Benchmark Rate & USDIDR Benchmark Rate & 10-year Government Bond Yield Source: Bank Indonesia, Bloomberg, NH Korindo Research Source: Bank Indonesia, Bloomberg, NH Korindo Research 8

9 Welcoming Net Buy by Foreign Investors in Stock Market In September JCI slipped, posted the loss in a stark contrast to rally territory where majorities of Asia markets reigned. However since July 2018, within the 3-consecutive months, Indonesia s stock market experienced no massive capital outflows. This backdrop was the logical takeaway for JCI s stable movement at the range of 5,700-6,000. Considering the stable rupiah coupled with the rally in the government s bonds, foreign investors likely start to post massive net buy; it impacts on JCI s rally in October. Global Market Performance Foreign Net Buy (Sell) Position in JCI (IDR tn) 9

10 Consumer and Automotive Sectors Reigning in September s Rally Territory. After blown by the negative sentiment of the rising benchmark rate by BI, the property sector posted a steep decline of 6.6% led September s decline in JCI. However, in September the two large-cap sectors, namely Consumer and Misc. Industries were reigning in a rally mood of 2.4% and 1.3%, respectively. It signed that the decline in JCI should not spark fears. The rally in consumer sector was entwined with the core inflation climbing consistently, signaling the recovery in Indonesia-based consumption. UNVR led the rally by posting the rally of 7.5%. On the other side, INDF waned by 6.3%. INDF s divergent stock price is potential for rebound. Meanwhile the rally in misc. industries were attributable to the rally in ASII s stocks. The performance of Indonesia-based automotive sales is a positive catalyst for ASII. Sector Performance Major Consumer & Automotive Stocks Performance 10

11 High Chance of October s Rally JCI posting the decline in September caused its current valuation of forward P/E to settle at 14.3x. The widening gap between the current valuation and the average forward P/E of 15.3x causes its current valuation quite attractive. Until the end of 2018, JCI is potential for reaching the target of 6,375. Since 2012, JCI s posted the average hike of 2.3%. Only once did JCI posted the decline of 0.9% in October 2014, after the profit taking ruled amid the Presidential oath of Joko Widodo. Considering the stable rupiah and recovery in the bonds market, we are optimistic that JCI likely nudges up 1% at the minimum similar to its rally in October 2016 and Forward P/E JCI Seasonality Monthly Return in October 11

12 Top Recommendation: Aneka Tambang (ANTM Metal and Mineral) Dec 2019 TP 1,200 Consensus Price 1,251 TP to Consensus Price -4.1% vs. Last Price +42.0% Last Price (IDR) 845 Price date as of Sep 28, wk range (Hi/Lo) 1,015 / 600 Free Float (%) 35.0 Outstanding sh. (mn) 24,031 Market Cap (IDR bn) 19,825 Market Cap (USD mn) 1,330 Avg. Trd Vol 3M (mn) Avg. Trd Val 3M (bn) Foreign Ownership 5.8% Sales Breakdown: Gold 68.1% Nickel 26.9% Others 5.0% IDR bn FY2017 FY2018E FY2019E FY2020E Sales 12,654 22,573 24,763 26,281 y-y 39.0% 78.4% 9.7% 6.1% EBITDA 1,434 3,255 3,160 3,453 Net profit ,045 1,125 EPS (IDR) y-y 110.6% 535.7% 20.4% 7.7% NPM 1.1% 3.8% 4.2% 4.3% ROE 0.7% 4.6% 5.3% 5.4% EV/EBITDA 14.8x 8.8x 9.4x 9.5x P/BV 0.8x 1.0x 1.0x 1.0x 2Q18: Downbeat Margin ANTM posted 2Q18 s sales of IDR6.08 trillion (+6% q-q or +347% y-y). On the cumulative basis, 1H18 s revenue reached IDR11.85 trillion (+292.4% y-y). Meanwhile, 2Q18 s net profit was IDR99 billion vs. 1Q18 s net profit of IDR246 billion (-60% q-q). Meanwhile, its EBIT margin was 3.3% (vs. 5.5% in 1Q18) and net profit margin was 1.6% (vs. 4.3% in 1Q18). 2Q18: Bottom Line Constrained by the U.S. Dollar Its finance costs amounted to IDR190 billion soaring 120% q-q (vs. IDR86 billion in 1Q18). The biggest contributor is the interest expense of long-term debt and bonds debt interest. Furthermore, the loss of forex gain was IDR173 billion soaring 122% (vs. IDR78 billion in 1Q18). 72% of its total debt was in the U.S. dollar denomination sensitive to the trend of rupiah depreciation. 2018E: Increment in Target of Gold Sales ANTM revised its target of gold sales from 24 tons at the early of 2018 to 25.3 tons consisting of the domestic sales of 13 tons and the exports sales of 12.3 tons. Until 8M18, its gold sales reached 18.1 tons consisting of the domestic sales of 10.7 tons and the exports sales of 7.4 tons. The 8M18 s sales reached 71.5% of 2018 s sales target of 25.3 tons of gold. Share Price Performance Revenue & Growth F 12

13 Top Recommendation: Indofood Sukses Makmur (INDF Consumer) Dec 2019 TP 8,175 Consensus Price 8,250 TP to Consensus Price -0.9% vs. Last Price +38.6% Last Price (IDR) 5,900 Price date as of Sep 28, wk range (Hi/Lo) 8,675 / 5,850 Free Float (%) 49.9 Outstanding sh. (mn) 8,780 Market Cap (IDR bn) 52,683 Market Cap (USD mn) 3,534 Avg. Trd Vol 3M (mn) 6.06 Avg. Trd Val 3M (bn) Foreign Ownership 18.6% Sales Breakdown: Consumer Branded Products 52.4% Flour Division 22.5% Others 25.1% IDR bn FY2017 FY2018E FY2019E FY2020E Sales 70,187 74,313 80,492 87,963 y-y 5.1% 5.9% 8.3% 9.3% EBITDA 10,436 11,615 13,218 14,490 Net profit 4,139 4,601 5,264 5,802 EPS (IDR) y-y -0.1% 11.2% 14.4% 10.2% NPM 5.9% 6.2% 6.5% 6.6% ROE 9.1% 9.5% 10.3% 10.7% P/E 16.2x 11.3x 9.8x 8.9x P/BV 1.4x 1.0x 1.0x 0.9x CBP Division as the Pillar of INDF s Stability The Consumer Branded Products (CBP) division remains to be INDF s backbone because this division contributes 52% to INDF s total sales. The CBP division dominates virtually 72%-75% of Indonesia-based instant noodles market shares and continuously innovates new products, e.g. the launch of Indomie Mi Keriting Goreng Rasa Telur Asin expected to accelerate its future growth. Furthermore, ICBP carried out the increment of 10% in production capacities of instant noodles distributed to Greater Jakarta; accordingly, the total national capacities reach 18 billion packages per year. Overseeing ICBP s market share dominance, we estimate that the CBP division likely maintains a stable growth of 5-6% per year from 2018 to 2020 with the net profit margin at around 12%. Awaiting Surprises from Flour Division and Agribusiness Division We estimate that the flour division and the agribusiness division will give surprises of rosier sales. The cost-plus sales strategy and the recovery in prices of milled wheat flour since the early of 2018 are the growth pillars for the flour division. The flour division posted the increment of 6% and 12% in 1Q18 s sales and 2Q18 s sales, respectively. Such rosier sales were in stark contrast to the decline of 5% and 6% in 1Q17 s sales and 2Q17 s sales. The Agribusiness division is suffering from waning sales because of sluggish CPO prices. The further implementation and improvement in the biodiesel mandatory are rebound drivers for CPO prices because the policy inevitably raises the demand for CPO. Bloomberg Agriculture Index currently settles at the lowest level within 18 months and is estimated to be rebound within two years as it is backed by the B20 mandatory competing with the rising crude prices. Share Price Performance Bloomberg Agri Index 13

14 Top Recommendation: Bank Rakyat Indonesia (BBRI Bank) Dec 2019 TP 3,930 Consensus Price 3,768 TP to Consensus Price +4.3% vs. Last Price +24.8% Last Price (IDR) 3,150 Price date as of Sep 28, wk range (Hi/Lo) 3,920 / 2,720 Free Float (%) 43.2 Outstanding sh. (mn) 123,346 Market Cap (IDR bn) 391,006 Market Cap (USD mn) 26,228 Avg. Trd Vol 3M (mn) Avg. Trd Val 3M (bn) Foreign Ownership 24.3% Interest Income Breakdown: Loan 86.6% Non-Loan 13.4% 2Q18 s Profit: Constrained by High Provision BBRI posted the net profit of IDR7.5 trillion or growing by 10.4% y-y lower than the estimated net profit of IDR8.4 trillion. The lower net profit was attributable to the high provision cost of IDR5.0 trillion (vs. the estimated provision cost of IDR4.2 trillion). Despite the sliding net profit, the 2Q18 s interest income, net interest income, operating revenue, and pre-provisioning operating profit (PPOP) were pursuant to the esti mate we make. Growth Acceleration in Credit Distribution BBRI enjoyed the growth of 15.5% y-y to IDR794.3 trillion in credit distribution. The growth was the all-time high since the 1Q17. Its small commercial segment succeeded to mark the growth of 21%, while its SOE segment surged by 24% after sliding in the 1Q18. We overview that its 2018 s credit outgrows 14%. Expectancy of 2018 s Net Profit Acceleration We overview that BBRI likely enjoys the rosier net profit of 13.7% y-y to IDR 32.4 trillion (vs. the 2017 s growth of 10.7%). The pressure stemming from the high provision cost likely subdues, particularly in the 4Q18, while the net interest margin likely remains to stand at 7.7% since the 1Q18. Indeed, it most likely enjoys the sliding cost of deposits thanks to the 4Q18 s hike in the savings account. IDR bn FY2016 FY2017 FY2018E FY2019E Share Price Performance Credit Growth & NIM Int. Income 94, , , ,114 y-y 10.9% 8.6% 10.6% 14.3% Op. Rev. 84,580 92, , ,282 Net profit 26,196 28,997 32,976 39,022 EPS (IDR) y-y 3.1% 10.7% 13.7% 18.3% NIM 8.0% 7.6% 7.8% 7.9% ROE 20.2% 18.5% 18.7% 20.0% P/E 11.0x 15.5x 11.8x 10.0x P/BV 2.0x 2.7x 2.1x 1.9x 14

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