CreditSuisse: Indonesia Equity Sales

Highlights of the Day
· Markets: Review and Outlook
· Local News: ASII / UNVR / PGAS / ADRO / INTP / INCO / ISAT / SIMP
· Picture of the Day: Partai Demokrat’s Ex-Treasurer Arrested in Colombia

Markets: Review and Outlook
Equities: The JCI stayed in positive territory for three consecutive days last week, but closed rather flat at 3890 on Friday. Selling pressures eased off as bargain hunters came into the picture. Turnover, however, normalized and stood at US$600 mn on Friday. Banks, consumers and commodities closed higher. Our order pad is rather balanced today on second liner names.

Fixed Income: Yield on benchmark government bond closed 3bps lower at 6.95% on Friday. Bank Indonesia Governor Darmin Nasution expects more capital inflows into Indonesia following the Fed’s decision to keep US interest rate close to zero. The central bank, however, remains cautious for sudden market volatility and has prepared measures to guard the currency and the bond markets.

Currency: The rupiah closed lower at 8,554/US$. Despite the cautious mood, demand for Indonesian risky assets remains firm, given the economy’s robust fundamentals.

Local News: ASII / UNVR / PGAS / ADRO / INTP / INCO / ISAT / SIMP
Please note that the items below are taken directly from local newspapers. Hence, Credit Suisse does not guarantee the accuracy of the stories.

Astra International (ASII, N, PT Rp79,200): Multi Finance Companies Expanding Outside Java
Multi finance companies are expanding outside Java amid rising regional GDP per capita and higher consumer consumption. Astra Credit Company Risk Management Head, Handoko Liem stated that ACC will add four new branches in Java, Sulawesi and Sumatra. According to Mr Liem, 30% of 2W financing comes from Jakarta, while the other 30% and 40% comes from Java and non-Java (Sumatra, Kalimantan and Sulawesi).

Sales commentary: There are lots of upside for ASII’s auto financing, if the company decided to be more aggressive on this business. Note that the ROA for ASII financial services division averages at ~8% – double than that of the most profitable banks in the world, Bank Rakyat Indonesia (BBRI, O, PT Rp8,350) – with a leverage multiplier of only 4x (vs 10x maximum level allowed for banks by the regulators). We are a buyer of ASII.

Unilever Indonesia (UNVR, U, PT Rp14,000): Sold Taro Snack for More Than Rp200 bn
UNVR has divested Taro Snack to Tiga Pilar Sejahtera (AISA, Not Rated) at more than Rp200 bn according to Investor Daily.

Sales commentary: Taro (crackers) Snacks is expected to double AISA sales to Rp500 bn in 2012. AISA is a US$153 mn cap company. With the aforesaid estimate, Taro Snack contribution is estimated at only 1.0% to UNVR’s 2012 top line. We are not too excited on this divestment for UNVR.

Perusahaan Gas (PGAS, O, PT Rp5,000): BP Migas: Gas Purchase at US$5.5/MMBTU
BP Migas requested PGAS to renegotiate its gas purchase price to US$5.5/MMBTU. PGAS will agree to the proposal on two conditions: 1) gas supply security/priority for the company; and 2) higher gas volume allocation for the company.

Sales commentary: In the middle of this gas purchase price renegotiation, Natural Gas Industrial Consumers Forum states that Indonesia will turn into gas importer, especially with Singapore’s ambition to be the energy hub in the region. At present, Indonesia’s gas supply to Singapore stands at 835mmscfd, which is sold at US$9.0/MMBTU. Meanwhile, the local gas buyers are paying US$6.8/MMBTU. The conditions posed by PGAS are overhangs to the share price, in my view. With the potential closing of the gap, technically, we are a buyer into strength for PGAS in the short-term.

Adaro Energy (ADRO, U, PT Rp2,050): Pemalang Power Plant’s PPA to be Signed soon
The consortium of JPower-Itochu-ADRO is expected to sign the power purchase agreement (along with coal supply contract) for 2x100 Pemalang power plant at the end of the month. The project worth US$3.2 bn and is targeted to be in operations by 2017. ADRO will be supplying 6-7 mn tons of coal per annum for the Central Java power plant.

Sales commentary: It appears that ADRO power plant projects, first the one in Kalimantan, and now this one is Java is progressing well. We think the construction of these projects will accelerate with the passing of the government Land Acquisition Bill, targeted in the next 6-9 months. We, however, are not too excited on the sector at the moment, and prefer to sell into strength on ADRO.

Indocement Tunggal (INTP, N, PT Rp18,400): Targets 7.4% Growth in 2011 Net Profit
INTP President Director Daniel Lavalle is targeting to 2011 net profit of Rp3.5 tn (+7.4% YoY). INTP 1H11 net profit stood at Rp1.73 tn, and the 2011 target above is considered conservative due to higher energy costs.

Sales commentary: The stated bottom line above is in-line with the market expectations, which we think is fair. Our top pick in the sector, however, is Semen Gresik (SMGR, O, PT Rp11,500) on its on-going capacity expansion.

INCO Indonesia (INCO, N, PT Rp4,400): President Director Resigns
INCO President Director, Tony Wenas has officially resigned from the company last week. Mr Wenas joined INCO in March 2010 from Freeport Indonesia, replacing the INCO’s President Director, Arief Siregar, who also resigned from the company. Investor Daily reported that INCO’s executives – Claudio Bastos (ex-Vice President Director), Ciho Bangun (ex-COO), Peter Fernanto (ex-GM) and Parlian Marpaung (ex-Project Manager of Bahadopi) – have been determined as suspects by East Luwu State Court, South Sulawesi, for environmental damages and illegal use of mining areas.

Sales commentary: We have heard about local government complaints about INCO’s operations in South Sulawesi – environmental, infrastructure, ownership sharing with the local government and royalty issues. We feel the aforesaid issues could drag on and disrupt INCO’s focus on its operations. We are a seller of INCO at this juncture.

Indosat (ISAT, O, PT Rp7,900): MSOE Questioned the Planned Tower Sale
SOE Minister Mustafa Abubakar stated that he has not received formal report from ISAT on the planned tower sale. The government owns 14.3% stake in ISAT, while Qatar Telecom owns 56% stake and custodian Bank of NY Mellon holds 15%.

Sales commentary: The media widely report the potential transaction, and we hope MSOE will give his blessings on the transaction. We are positive on Indonesia’s telecom sector at the moment as the issue of cut throat price competition is no longer an issue. For ISAT, we like its relatively stronger data business relative to its peers. Our top pick in the sector, however, is Telkom (TLKM, O, PT Rp9,750), especially on its buyback plan, on top of the return of its earnings growth potential.

Salim Ivomas (SIMP, O, PT Rp1,850): 114% Growth in 1H11 Net Profit
Bisnis Indonesia reported that SIMP 1H11 net profit grew 114% to Rp885 bn. Meanwhile, holding company Indofood Agri (IFAR SP, N, PT S$1.75) 1H11 net profit is reported at Rp823 bn (+51% YoY).

Sales commentary: SIMP is our top pick in the CPO space due to valuation – 9.6x/11.1x 2011/12 PE respectively, vs industry’s at 11.5x/15.2x. We are a buyer of SIMP.

source: CreditSuisse dated 15 August 2011