Rupiah plays

Since last week, the rupiah, along with other Asian currencies, has taken some beating amidst extensive global risk aversion triggered by debt issues in Europe and increased risks in the banking system globally. As in 2008, foreign companies have been hoarding cash (hence tightening liquidity in money markets) in the face of uncertainties. The rupiah that has declined by 4.5% in the past week. It touched a level just above Rp9,000/USS, last seen seven months ago, before closing at Rp8,893/US$. On the bond market front, the rupiah bond was among those experiencing the most sales with its yield escalating by as much as 65bps. There has been some profit‐taking in the equity market as well. Both the Indonesia equity and bond markets have performed very well on a year‐to‐date basis just before the sell‐off. We believe the rupiah weakening would be temporary. The rupiah will rebound as the global economic risks decline and risk appetite returns. For instance, when Lehman Brothers collapsed in September 2008, which increased risks in the global banking system, the rupiah fell to its weakest level in November 2008; however, it had appreciated steadily from then on. This time around, we may see the same trend, though probably in a more moderate form.

Indonesia’s bright growth prospect and strong fundamentals will support the currency. The currency’s recovery going forward will also be due to the economy's substantial domestic base, combined with a relatively light fiscal burden. The sovereign rating upgrade to investment grade by Standard & Poor’s (expected next year) will further improve the country’s risk profile, hence benefiting the rupiah.

We believe Bank Indonesia would not increase rates, as it considers the weakening rupiah to be temporary in light of the country’s fundamentals. Instead, the Central Bank will put growth as priority. Since last week, it has supported the currency by intervening in the market. In the short term, as the rupiah weakens, it will exert a negative impact on companies with US$‐denominated debt and/or those whose products contain a high amount of imported raw materials. On the other hand, exporters in general will benefit from the weak rupiah.

We list a number of stocks under the negative and positive lists below.
NEGATIVE LIST
Holcim Indonesia (SMCB.IJ)
Indofood CBP (ICBP.IJ)
Unilever (UNVR.IJ)
Indosat (ISAT.IJ)
Telkom Indonesia (TLKM.IJ)
Charoen Pokphand (CPIN.IJ)

POSITIVE LIST
Timah (TINS.IJ)
Adaro Energy (ADRO.IJ)
Bukit Asam (PTBA.IJ)
Bumi Resources (BUMI.IJ)
Indo Tambangraya (ITMG.IJ)
United Tractors (UNTR.IJ)
Perusahaan Gas Negara (PGAS.IJ)
Astra Agro Lestari (AALI.IJ)
London Sumatra (LSIP.IJ)
Asahimas Flat Glass (AMFG.IJ)


NEGATIVE LIST
Holcim Indonesia (SMCB.IJ, BUY, TP Rp2,525)
􀂃 Holcim is in the early stages of expanding its production capacity. As it will be importing machines from European countries, its costs in rupiah will balloon as a result.
􀂃 Huge US$‐denominated debt (US$125m) on the balance sheet.
􀂃 Around 60% of production costs are US$‐linked, while revenues are in rupiah and Malaysian ringgit, both of which tend to move in tandem.
􀂃 We still recommend BUY on the stock due to its valuation, with TP of Rp2,525. The stock is pegged at 2012F PER and PEG of 15.3x and 0.8x, respectively.

Indofood CBP (ICBP.IJ, BUY, TP Rp6,800)
􀂃 As commodities are traded globally, their prices are linked to the US$. Hence, ICBP’s raw material costs are linked to the US$ as well. But the company’s revenue is mostly denominated in rupiah terms. This currency mismatch creates a risk for the company. For example, a weak rupiah is negative for ICBP as it means higher costs and vice versa.
􀂃 However, as commodity prices are declining, so are raw material costs, thus cushioning the impact of the weak rupiah. As prices of major raw materials have dropped by far more than the exchange rate, we are not worried about the stock. Since the end of August, the prices of hard wheat and crude palm oil have have dropped by 15% and 5%, respectively.
􀂃 Maintain BUY, TP is Rp6,800 (pegging the stock at 17.5x 2012F PER).

Unilever (UNVR.IJ, BUY, TP Rp18,300)
􀂃 Similar to ICBP, Unilever uses raw materials that are linked to the US$. A weak rupiah is negative for ICBP as it means higher costs and vice versa. 􀂃 However, as commodity prices are declining, so are raw material costs, thus cushioning the impact of the weak rupiah. As prices of major raw materials have dropped by far more than the exchange rate, we are not worried about the stock. In addition, Unilever hedges all of its foreign currency transactions.
􀂃 Maintain BUY, TP is Rp18,300 (pegging the stock at FY12F 30.2x PER, 22.2x EV/EBITDA, 5.4x P/S). We like Unilever’s superb ROE (1H11: 118.4%), sound management, leading market shares, and solid distribution network.

Indosat (ISAT.IJ, HOLD, TP Rp6,200)
􀂃 Around 55% of Indosat’s debt is in US$ and only ~8% is hedged. Hence, a weak rupiah will be negative for Indosat.
􀂃 HOLD, TP is Rp6,200 (pegging the stock at 4.0x FY12F EV/EBITDA).

Telkom (TLKM.IJ, HOLD, TP Rp8,350)
􀂃 Around 17% of Indosat’s debt is in US$. However, considering Telkom’s det debt to equity of only 15%, a weak rupiah will only be slightly negative for the company.
􀂃 HOLD, TP is Rp8,350 (pegging the stock at 13.0x 2012F PER and 4.0x 2012F EV/EBITDA).

Charoen Pokphand (CPIN.IJ, BUY, TP Rp3,500)
􀂃 Rupiah weakening will have a negative impact on Charoen Pokhpand Indonesia: around 40% of its corn is still imported and most of its soybean meal products are imported. Corn makes up ~50% of raw material costs, while soybean meal products contribute ~25%.
􀂃 Maintain BUY due to valuation. Its aggressive capacity expansion and ability to pass on increased costs will support growth. TP represents 17.1x 2012F PER.

Japfa Comfeed (JPFA.IJ, HOLD, TP Rp4,720)
􀂃 Similar to Charoen Pokphand, though with a lower ability to pass on cost increases.

Malindo Feedmill (MAIN.IJ, TRADING BUY, TP Rp1,530)
􀂃 Similar to Charoen Pokphand. Maintain BUY due to valuation. Its aggressive capacity expansion and ability to pass on increased costs will support growth. Current price represents 7.7x FY12x PER, while TP is 11.0x 2012F PER.

POSITIVE LIST
Timah (TINS.IJ, BUY, TP Rp2,825)
􀂃 Virtually all revenues are in US$, while around 50% of mining costs are in rupiah. The company also has no US$ debt on the balance sheet.
􀂃 Diverse customer base, with majority of revenues from Asian customers. The company is thus relatively protected from the downturn in US and Europe.
􀂃 The stock is lagging the market, and is now trading at an undemanding valuation of 8.9x 2012F PER. We give a BUY recommendation with TP of Rp2,825, pegging it at 12.1x 2012F PER.

Adaro Energy (ADRO.IJ, BUY, TP Rp2,650)
􀂃 Revenues are denominated in US$, while most costs, especially contractor costs and fuel, are based in US$.
􀂃 Some mining costs, notably labour, are in rupiah. The company’s debts are denominated in US$; hence, there will be no impact on the balance sheet.
􀂃 Overall, the weakening rupiah is positive. We maintain our target price of Rp2,650 that warrants a BUY recommendation. Our target price translates into 14.1x FY12 PER.

Bukit Asam (PTBA.IJ, BUY, TP Rp27,000)
􀂃 About 65% of its sales are aimed at the domestic market, while the export market accounts for the balance.
􀂃 In the domestic market, the company’s sales are based in rupiah. Currently, it has a one‐year contract with Indonesia Power, its biggest customer that accounts for almost half of its coal production. Domestic spot coal price, however, is still linked to the US dollar.
􀂃 In the export market, Bukit Asam sells also on spot market with US dollar denominated.
􀂃 The company has no debt and is cash‐rich. Mining costs, apart from contactor costs and fuels, are denominated in rupiah.
􀂃 Overall, a stronger US dollar will benefit Bukit Asam. We maintain BUY on the counter with a target price of Rp27,000, pegging it at 17.5‐13.5x FY11‐12 PER.

Bumi Resources (BUMI.IJ, HOLD, TP Rp3,100)
􀂃 Revenues are denominated in US$, while most costs, especially contractor costs and fuel, are based in US$.
􀂃 Some mining costs, notably labour, are in rupiah. The company also has a small amount of cash and receivables in rupiah, which is offset by some rupiah‐based trade payables.
􀂃 Overall, the weakening rupiah is positive for Bumi Resources. HOLD with target price of Rp3,100, pegging the stock at 11.8x FY11 PER.

Indo Tambangraya (ITMG.IJ, BUY, TP Rp57,200)
􀂃 Revenues are denominated in US$, while most costs, especially contractor costs and fuel, are based in US$.
􀂃 Some mining costs, notably labour, are in rupiah. The company does not have any debt and is in a net cash position.
􀂃 Overall, the weakening rupiah is positive for the company. We recommend BUY with target price of RP57,200, pegging the stock at 17.2‐12.3x FY11‐12 PER.

United Tractors (UNTR.IJ, HOLD, TP Rp26,100)
􀂃 For its distribution business, the company purchases heavy equipment in US$ and sells with some profit margin also in US$. The weakening rupiah will thus boost its revenue.
􀂃 For mining contracting, about 40% of the company’s costs are based in rupiah, while the remaining 60% are denominated in US$. Revenue contracts in mining contracting are almost entirely in US$. Hence, the weakening rupiah will ease margin pressure that has been observed in the last two years.
􀂃 Overall, a weaker rupiah will benefit United Tractors. We recommend HOLD on the counter with a target price of Rp26,100, pegging the stock at 18.8‐ 14.2x FY11‐12 PER.

Astra Agro Lestari (AALI.IJ, BUY, TP Rp25,800)
􀂃 As the biggest listed CPO producer with revenue exposed entirely to oil palm products, the company is clearly the biggest benefactor of the weaker rupiah against the US dollar.
􀂃 Sound balance sheet, net cash position and no debt.
􀂃 We recommend BUY on the counter with target price of Rp25,800, pegging the stock at 13.6x ‐13.3x FY11‐12 PER.

London Sumatra (LSIP.IJ, BUY, TP Rp2,900)
􀂃 Two main commodities, oil palm products and rubber, are based on US$.
􀂃 Production of FFB from nucleus showed a good growth of 15.7% in 1H11, thanks to higher yield, while CPO production rose by 25% y/y, helped by FFB purchased from a third party.
􀂃 We recommend BUY with target price of Rp2,900, pegging the stock at 11.4‐11.3x FY11‐12 PER.

Perusahaan Gas (PGAS.IJ, HOLD, TP Rp3,100)
􀂃 Over 95% of its revenue is denominated in US$, while the cost of gas is entirely in US$. A stronger US dollar will increase its revenue.
􀂃 On the other hand, its operating costs and depreciation are in rupiah.
􀂃 On the balance sheet, the company still has around US$900m in debt, about 37% is denominated in US$, with the remaining 63% in Japanese Yen.
􀂃 The company is also involved in a derivative contract to hedge its yen position.
􀂃 Overall, a weaker rupiah will benefit the company. We recommend HOLD, based on our concerns over the risks of the rising cost of gas, along with the inability or time lag to pass on cost increases to customers.

Asahimas Flat Glass (AMFG.IJ, HOLD, TP Rp8,800)
􀂃 The weakening rupiah will have a positive impact on Asahimas, as 37% of Asahimas Flat Glass sales involve primarily exports, 81% of which are to the Asia market. In addition, most production costs are in rupiah. As a result, a weak rupiah will increase the company’s profit margin.
􀂃 The company has no interest‐bearing liabilities.
􀂃 We are monitoring 3Q11 sales following the lower sales volume in 2Q11 due to the disaster in Japan in March.

source: KIMENG dated 21 September 2011