Some investors are concerned about Indonesia’s expensive market valuation. There is some truth in this we believe. Based on 71 listed companies under Bahana Securities’ coverage, some 80 percent of total market capitalization, the Indonesian market currently trades on 2012 Price to Earnings Ratio (PER) of 14.8x (exhibit 1) with PE to Growth ratio (PEG) of 1.0x on slowing year-on-year Earnings Per Share (EPS) growth of just 15 percent, down from 28 percent year on-year (y-y) in 2011.
Hence, market performance has been lackluster, up just 4.5 percent year-to-date (ytd), the second worst performing market in the region year-to-date next to Malaysia. However, in dollar terms, the Indonesian market’s return is the worst in the region at just 4.9 percent as the Indonesian rupiah (IDR) has appreciated just 0.4 percent ytd against the US dollar (USD).
20 low PE stocks with growth
As investors are risk averse to high PE stocks at this stage of the cycle, we point investors to companies that still provide values relative to market valuation. In exhibit 1, we rank the 71 companies in our stock universe by 2012 PE from lowest to highest.
Separating the wheat from the chaff, we have come up with the following 20 low PE stocks with solid fundamentals and low PEG (i.e. solid EPS growth) for investment consideration: Lippo Cikarang (LPCK-BUY-IDR1,930-TP:IDR2,350), Adhi Karya (ADHI-BUY-IDR730-TP:IDR890), Indika Energy (INDY-BUY-IDR2,650-TP:IDR3,200), Bank Jabar Banten (BJBR-BUY-IDR1,120-TP:IDR1,300), Japfa Comfeed Indonesia (JPFA-BUY-IDR4,250-TP:IDR5,300), Pembangunan Perumahan (PTPP-BUY-IDR640-TP:IDR770), Gajah Tunggal (GJTL-BUY-IDR2,850-TP:IDR3,650), Indo Tambangraya Megah (ITMG-BUY-IDR43,5000-TP:IDR49,900), Wijaya Karya (WIKA-BUY-IDR750-TP:IDR810), Sampoerna Agro (SGRO-BUY-IDR3,475-TP:IDR4,100), Kawasan Industri Jababeka (KIJA-BUY-IDR191-TP:IDR285), Citra Marga Nusaphala Persada (CMNP-BUY-IDR2,000-TP:IDR2,000), Harum Energy (HRUM-BUY-IDR8,750-TP:IDR10,950), Total Bangun Persada (TOTL-BUY-IDR430-TP:IDR450), Bank Negara Indonesia (BBNI-BUY-IDR3,650-TP:IDR5,300), Bank Rakyat Indonesia (BBRI-BUY-IDR6,950-TP:IDR8,800), Adaro Energy (ADRO-BUY-IDR2,000-TP:IDR2,300), Bukit Asam (PTBA-BUY-IDR21,000-TP:IDR26,600), Charoen Pokphand Indonesia (CPIN-BUY-IDR2,800-TP:IDR3,275) and Indofood Consumer Branded Products (ICBP-BUY-IDR5,500-TP:IDR7,200).
With plenty of stocks trading at above market PE, we believe stocks with low valuations are poised to experience re-ratings on rotational play. On the flip side, investors should trim exposure on high PE and PEG stocks like Unilever Indonesia (UNVR-HOLD-IDR19,150-TP:IDR18,250) & Kalbe Farma (KLBF-REDUCE-IDR3,500-TP:IDR3,000).
High yield stocks provide cushion
Amid current market volatility, investors should also seek shelter in stocks with high yields. On the right hand column of exhibit 1, we rank the highest dividend plays within our coverage. We note that the market yield is currently at 2.8 percent, still decent particularly given the current low interest rate environment.
It is interesting to find three stocks which provide yields higher than current domestic deposit rates: Indo Tambangraya Megah (ITMG) with 7.6 percent yield (not to mention upside potential to our target price of 25 percent), followed by Bank Jabar Banten’s (BJBR) 6.7 percent (18 percent upside to target price). We note that while Vale Indonesia (INCO-HOLD-IDR3,700-TP:1,400) has limited upside potential based on our target price of just 8.8 percent, inclusive of its high yield of 6.5 percent, INCO’s total return in excess of 15 percent remains attractive in our view. Happy trading!
The writer is senior vice president/head of research at Bahana Securities.
