Rupiah Plays
Compared with its ASEAN neighbours, in the past month Indonesia’s stock market has underperformed that
in Malaysia, the Philippines and Thailand.
A number
of factors have combined to trigger a sell-off in Indonesia – in the bond market
first and then the equity market. They are mainly external factors: the
Eurozone situation and the global economic slowdown, which have prompted
risk-averse investors to trim their bond and equity holdings in a bid to hoard
as much cash as possible. Internally, recent as well as upcoming policies (ie,
delay in fuel price hike, export tax on key mineral ores and limitation on
foreign ownership at banks) have caused jitters among foreign investors.
Although the policy changes contributed in some ways to the market sell-off, we
argue that the negative impact has been small compared with the fallout from
the European debt crisis.
Recent – and upcoming – policies
Delay in fuel price hike
Many are
concerned that the delay in fuel price hike will cause the budget deficit to
spiral out of control. While deficit spending will certainly increase, we note
that the government will limit it to around 2.23% of GDP, which is small
compared to other countries. In the light of friendlier oil prices recently and
the proposal to limit usage of subsidised fuel from early June, we believe that
a deficit of 2.23% of GDP is attainable.
Increase in export tax on key mineral ores
Higher
export taxes on key mineral ores have limited negative impact on the listed
companies, except Antam (ANTM.IJ). Vale Indonesia (INCO.IJ), in fact, stands to
benefit from the increase in nickel prices as a result of the policy. In
addition, such export tax helps increase government revenue and reduce the
budget deficit.
Limitation on foreign ownership of banks
The
upcoming limitation on foreign ownership of banks is another policy making
foreign investors jittery. Nevertheless, this needs to be done, as Indonesia’s
current policy of allowing foreigners to own up to 99% of its banks is the most
liberal in the region. Understandably, foreign investors are repulsed by a
backpedalling in any country’s investment policies. In any case, whatever the
new limits are, we believe that both the central bank and the government will
give banks ample time to
comply as
in the past.
Widening current account deficit
Current
account deficit is another concern. It has widened to USD2.9b, or 1.3% of GDP,
in 1Q12 from USD1.6b, or 0.7% of GDP, in 4Q11. Some have compared this to the
situation during the 2008 global financial crisis and believe that the deficit
will widen further as a result of worsening terms of trade (coal prices plunge
while oil prices rise). In our view, the increase in the current account
deficit has been offset to a large extent by strong FDI flows such that
international reserves continued to be at a high level. In 2010 and 2011, FDI
was in excess of USD11b and looks set to be sustained this year. This
contrasted with the situation in 2008 when FDI was only USD3.4b and current
account surplus plunged to USD126m from USD10.5b in 2007. In short, if FDI flow
remains robust in the succeeding quarters, it will compensate for the current
account deficit.
Weakening rupiah
The
rupiah has weakened by 5% in the past three months to IDR9,470/USD (spot), the
lowest level since 15 December 2009. The Monetary Policy Committee statement in
May pointed out that the rupiah slid by around 0.5% MoM in April due to high
import needs and heightened uncertainty in the global economic outlook. We note
that at this juncture the benchmark 10-yr bonds have seen some sell-off.
There has
been aggressive selling by foreign names in the bond market with 10-year yields
rising by 1.7% in the past 30 days to 6.47% as of this writing. Despite its
recent weakness, the rupiah depreciation is in line with the decline in
regional currencies against the greenback as investors
continue
their flight to safety to guard against mounting uncertainties. Depending on
what happens in Europe, we may be in for some
months of turbulence. Our Economist Luz Lorenzo is revising her rupiah forecast
to IDR9,000/USD for YE12 (from IDR8,800) and IDR9,200/USD for average FY12
(from IDR8,850).
We believe that Bank Indonesia is unlikely to increase rates, as
it considers the country’s fundamentals to be strong enough to weather a temporary
weakening of the rupiah. The central bank has supported the currency by
intervening in the market. It says it will continue to do so to
mitigate IDR volatility and stresses that the rupiah will remain
stable, if not strengthen in tandem with a surplus in the overall
balance-ofpayments position. While a weak rupiah will have a negative impact on
companies with USD-denominated debt and/or those whose products require a high amount
of imported raw materials, it will benefit exporters in general. We present a
list of stocks that fall under the negative or positive
category as follows.
NEGATIVE
LIST
Animal feed
Charoen Pokphand
(CPIN.IJ)
Japfa Comfeed (JPFA.IJ)
Malindo Feedmill
(MAIN.IJ)
Cement
Holcim Indonesia
(SMCB.IJ)
Computer &
services
Astra Graphia (ASGR.IJ)
Construction
Wijaya Karya (WIKA.IJ)
Consumer
Indofood CBP (ICBP.IJ)
Unilever (UNVR.IJ)
Property
Lippo Karawaci (LPKR.IJ)
Telco
Indosat (ISAT.IJ)
Telkom
Indonesia
(TLKM.IJ)
POSITIVE
LIST
Automotive
Astra International
(ASII.IJ)
Base metal
Timah (TINS.IJ)
Heavy equipment
United Tractors
(UNTR.IJ)
Mining
Harum Energy (HRUM.IJ)
Plantation
Astra Agro Lestari
(AALI.IJ)
Other
Asahimas Flat Glass
(AMFG.IJ)
NEGATIVE LIST
Charoen Pokphand Indonesia
(CPIN.IJ, BUY, TP IDR3,300)
The weakening rupiah
will have a negative impact on Charoen Pokhpand Indonesia in terms of raw material
costs: around 40% of its corn and most of its soybean meal products are
imported. Corn makes up ~50% of raw material costs while soybean meal products
contribute ~25%. However, the impact would be minimal as corn prices have
fallen by 21% YoY to USD5.85 per bushel.
The company has made a
USD100m draw-down under its credit facility of USD250m obtained in September
2011. As it has USDdenominated loan, it would have to bear foreign exchange
translation losses arising from the rupiah depreciation.
We maintain our BUY
recommendation in view of the company’s solid earnings growth, supported by higher sales
volume on capacity expansion, sustainable margins amid better DOC price and
lower raw material costs. Our target price pegs the stock at 18.1x FY12F PER.
Japfa Comfeed (JPFA.IJ, HOLD, TP
IDR4,500)
Similar to Charoen
Pokphand, the weakening rupiah has a negative impact in terms of raw material
costs.
Maintain HOLD.
Malindo Feedmill (MAIN.IJ, BUY,
TP IDR1,750)
Like Charoen Pokphand,
the weakening rupiah will a negative impact on Malindo Feedmill in terms of raw
material costs.
Maintain BUY on
attractive valuations. The company posted the highest earnings growth in the
poultry industry in 1Q12, supported by aggressive expansion, higher feed mill and
lower raw material costs, especially for corn.
Our target price pegs the
stock at 10.5x FY12F PER.
Holcim Indonesia
(SMCB.IJ, HOLD, TP IDR2,750)
A fair amount of
USD-denominated debt (~USD95m) on its balance sheet.
Around 60% of production
costs are USD-linked, whereas revenues are mostly IDR-denominated.
Holcim is in
expansionary mode, which should see it importing machines/equipments from Europe, thus leading to higher costs.
Maintain HOLD. Our
target price pegs the stock at 17.5x FY12F PER and EV/tonne of USD236.
Astra Graphia (ASGR.IJ, BUY, TP
IDR2,040)
The weakening rupiah
will have a negative impact on Astra Graphia as it imports most its document
solution products. Costs have to be recalculated and there are concerns that
customers will postpone purchases until rupiah volatility becomes benign.
We are monitoring the
impact the rupiah depreciation would have on the company’s performance in 2Q12.
Maintain BUY in view of
the strong 1Q12 results (1Q revenue is historically the lowest in the year). Our TP pegs
the stock at 14.6x 2012F PER.
Wijaya Karya (WIKA.IJ, HOLD, TP
IDR1,100)
Around 5% of the company’s
total revenue is USD-denominated. Hence, a weak rupiah will only have a small
negative impact on the bottom line.
Maintain HOLD. Our
target price pegs the stock at 15.5x FY12F PER.
Indofood CBP (ICBP.IJ, BUY, TP
IDR7,050)
As commodities are
traded globally, their prices are linked to the USD. Hence, ICBP’s raw material
costs are linked to the USD 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. In 1Q12 the prices of hard
wheat and crude palm oil have fallen by 19% and 11% YoY, respectively.
Maintain BUY. Our target
price pegs the stock at 13x 2013F PER.
Unilever (UNVR.IJ, BUY, TP
IDR26,350)
Similar to ICBP,
Unilever uses raw materials that are linked to the USD. A weak rupiah is
negative for Unilever 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. Our target
price pegs the stock at FY13F 35x PER. We like Unilever’s superb ROE (1Q12:
96%), sound management, leading market shares
and solid distribution network.
Lippo Karawaci (LPKR.IJ, BUY, TP
IDR900)
LPKR has ~90% of debt
denominated in USD and a small portion in SGD and IDR.
In line with its plan to
expand its hospital business, the company will purchase equipments mostly from China, thus
leading to higher expenditures.
Maintain HOLD. Our
target price pegs the stock at 19.4x FY12F PER.
Indosat (ISAT.IJ, HOLD, TP
IDR5,700)
Around 55% of Indosat’s
debt is in USD and only ~8% is hedged. Hence, a weak rupiah will be negative
for the company.
Maintain HOLD. Our
target price pegs the stock at 4.0x FY13F
EV/EBITDA.
Telkom Indonesia
(TLKM.IJ, HOLD, TP IDR8,350)
Around 17% of Telkom’s
debt is in USD. However, considering its net debt-to-equity of only 15%, a weak
rupiah will only be slightly negative for the company.
HOLD. Our target price
pegs the stock at 4.0x 2012F EV/EBITDA.
POSITIVE LIST
Astra International (ASII.IJ,
HOLD, TP IDR80,500)
Weakening IDR to USD
would have minimal impact on Astra International’s (ASII) automotive unit, as
costs and revenue in the manufacturing process are USD-based. Its automotive distribution
unit will also not be affected by currency fluctuations.
On a consolidated basis,
slight margin expansion for ASII could stem from its mining subsidiary, United
Tractors, in particular, the mining contracting business unit.
Negative sentiment from
higher down payment for auto purchase could result in slower 2012 earnings
growth, causing us to retain our HOLD rating.
TImah (TINS.IJ, BUY, TP
IDR1,970)
Timah sells almost all
of its products to the export market. On the flip side, employee costs and some
of its operating costs are in IDR, making the company a beneficiary of weak
IDR.
The company is still
spending heavily (equivalent to IDR1.8t) to modernise its mining fleet and
expand its docking facilities. But the capex will be mostly in IDR and hence,
will not be impacted by the currency movement.
Tin price has been
performing poorly in 2Q12 amid a weak global economy. We might have to revise
our forecast if the weakness persists in 3Q12. For now, our BUY call remains as
valuation is not demanding at 2012F PER of 9.6x.
United Tractors (UNTR.IJ, BUY,
TP IDR33,500)
United Tractors would
benefit from the weakening rupiah as its mining contracting revenue is fully
received in USD while part of the service cost is denominated in rupiah.
Additional benefit from
the depreciation of IDR would stem from UNTR’s net cash position. Note that
USD-denominated debt in 1Q12 stood at IDR325b, less than 10% of its total debt.
Potential margin
expansion in the mining contracting unit should partially compensate for margin
contraction in the construction machinery unit, paving the way for UNTR to stay
on track to register 2012 earnings growth of 12% YoY.
Harum Energy (HRUM.IJ, BUY, TP
IDR8,900)
Harum sells mostly to
the export market, but books costs also in USD. The rupiah weakness will be at
most slightly positive for the company.
The company had positive
net assets in foreign currency of IDR2.4t (USD255m in March 2012). If the
rupiah stays at this level, the company will book a significant forex gain for
FY12.
Maintain BUY as the
recent share price correction makes the stock attractive at 2012F PER of 9.5x.
Astra Agro Lestari (AALI.IJ,
HOLD, TP IDR18,000)
Astra Agro Lestari
(AALI) would benefit from the weaker rupiah, given the USD-linked palm oil
revenue.
As per 1Q12, it has zero
debt in its balance sheet with net cash position, paving the way for possible
forex gain.
On the flip side, with
rising fertiliser costs, margin pressure will likely hinder earnings growth in
2012. This, coupled with low production growth, has caused us to keep our
target price at
IDR18,000. Nevertheless, we upgrade our recommendation to HOLD
following the recent share price correction.
Asahimas Flat Glass (AMFG.IJ,
BUY, TP IDR7,750)
The weakening rupiah
will have a positive impact on Asahimas Flat Glass, as 37% of its sales involve
primarily exports, 81% of which are to Asia.
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 concerned about
upward pressure on energy costs as Perusahaan Gas Negara (PGAS.IJ) has raised
gas prices by 49% to USD10.13/MMBTU since 15 May 2012. We had anticipated a 30%
hike this year. Gas represents 26% of Asahimas’s cost of production and the
recent increase would soften gross margin to 26% from 27%, assuming selling
prices remain unchanged.
source: KIMENG dated 29 May 2012
