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Analysis: 1Q14 result preview: The good, the bad and the ugly

As the Jakarta Composite Index (JCI) has been one of the best-performing markets in the region year-to-date (ytd), we think corporate earnings will become an important determinant for stock-price movements

Harry Su (The Jakarta Post)
Fri, April 25, 2014

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Analysis: 1Q14 result preview: The good, the bad and the ugly

As the Jakarta Composite Index (JCI) has been one of the best-performing markets in the region year-to-date (ytd), we think corporate earnings will become an important determinant for stock-price movements. In our coverage universe (chart one), we expect operating-profit growth in the first quarter (Q1) of 2014 to accelerate to 11.9 percent year-on-year (y-y) from 2.9 percent y-y in 2013 Q1.

On the bottom line, we project 2014 Q1 net profit growth to rise to 14 percent y-y from 3 percent y-y in 2013 Q1. We think solid growth in 2014 Q1 would help support the Indonesian market'€™s recent strong performance and we retain our year-end 5,000 index target.

Following their strong 2013 Q1 performance, we expect plantation companies to continue booking excellent 2014 Q1 results, propelled by high average selling price '€” 2014 Q1 average crude palm oil (CPO) price: Rp 8,800 (76 US cents) per kilogram, +39 percent y-y.

In the auto sector, we expect solid earnings from strong growth in low cost green car (LCGC) sales, reaching 200,000 units in 2014. For oil-related stocks, earnings growth should be supported by PT AKR Corporindo'€™s (AKRA) performance, helped by 2013 Q1'€™s low base.

In this group, there are four industries with mixed performance in terms of operating and net-profit results (chart three) relative to the market. In the infra-related sectors, most construction companies should see lower-earnings growth due to the high base effect in 2013 Q1 with the exception of PT Waskita Karya (WSKT), which we expect to be the best performer within the industry.

For PT Jasa Marga (JSMR), we expect some earnings support to come from 2013 fourth quarter (Q4) 12-15 percent higher tariffs. In telco-related industries, we expect the three incumbents to book their normal high-single-digit y-y growth rates, while we forecast growth support from PT Sarana Menara (TOWR) and PT Tiphone Mobile Indonesia (TELE).

On the consumer front, while net-profit growth should be lower than the market'€™s, the difference should only be slight. In coal-related industries, we expect some results improvement due to two factors: A low base effect in 2013 Q1; and price support, as some contracts were signed using 2013 Q4 prices. However, we still expect coal prices to remain on a downward trend, resulting in unexciting results in the following quarters. Thus, we remain underweight on the coal sector.

Despite our expectations of a lower-than-market growth rate, banks have outperformed the index, helped by the turnaround in earlier negative perception on the peak interest rate level, leading to less concern on liquidity conditions and lower-than-expected non-performing loans (NPLs). In cement, we expect weak domestic consumption to be a drag on earnings growth for the sector.

Meanwhile, the cement sector has outperformed the market due to its perceived status as an infrastructure beneficiary. Perhaps two of the most surprising 2014 Q1 earnings expectations come from looking at the banks'€™ recent strong share-price performance, having outperformed the market by 11 percent ytd.

In poultry, despite rupiah appreciation resulting in more contained raw material prices, companies should see some adverse impact from weak day-old chick (DOC) and chicken prices due to seasonality.

In property, we expect earnings contractions on the back of the high base in 2013 Q1 and our expectation of slowing marketing sales this year caused by Bank Indonesia'€™s (BI) regulation to limit mortgage disbursements. The metal sector should remain the worst performer, as we expect some sales delays stemming from a lack of clarity and coordination during the initial stage of the implementation of the mineral-ore export ban.

In summary, we note the following three factors:

1. Plantations should begin to fare better, particularly given our expectation of strong 2014 Q1 earnings growth and recent currency depreciation to above Rp 11,600. Top pick: PT Astra Agro Lestari (AALI). Target price: Rp 35,000.

2. Telco sector performance should also improve. We expect solid 2014 Q1 results with net-profit growth of 18 percent, higher than the 14 percent growth in our stock universe. Top pick: PT Telekomunikasi Indonesia (Telkom [TLKM]). Target price: Rp 2,900.

3. On the flip side, banks'€™ significant market outperformance of 11 percent ytd should not be supported by above-market earnings growth rates, both at the operating and the net-profit levels, suggesting that the sector could experience profit-taking. Big-cap banks with downside or limited upside to our target prices are Bank Mandiri (BMRI). Target price: Rp 10,000; and Bank Central Asia (BBCA). Target price: Rp 11,500.

The writer is the senior associate director/head of equities and research at PT Bahana Securities

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