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Indonesian firms still underinvest compared to ASEAN peers
In relation to its regional peers, Indonesian firms may still be underinvesting as a consequence of limited capital spending, conservative balance sheet management and a lack of financial market depth, a new report by rating agency Standard & Poorâs (S&P) Rating Services finds
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n relation to its regional peers, Indonesian firms may still be underinvesting as a consequence of limited capital spending, conservative balance sheet management and a lack of financial market depth, a new report by rating agency Standard & Poor's (S&P) Rating Services finds.
The report, titled ASEAN Top Companies, surveyed 100 companies within the Southeast Asian region, including 15 large Indonesian firms.
Among the Indonesian firms are diversified conglomerate Astra International, cigarette maker HM Sampoerna, cement manufacturer Indocement Tunggal Prakarsa and state gas firm PT PGN.
S&P corporate ratings director for Asia Pacific Xavier Jean said on Thursday that the S&P had seen a substantial slowdown in these companies' capital spending since 2011.
'Capital spending between 2011 and 2013 didn't actually grow much. One of the reasons was that these companies were seeing decreasing returns, so it took more investment to generate the same amount of profits,' he said.
'They are also paying as much in dividends as they are in capital spending,' Jean added.
That resulted in a majority of the companies surveyed obtaining 'minimal', 'modest', or 'intermediate' status in their financial risk profiles, which are consistent with their investment-grade credit ratings level.
Of the 15 companies, only state-owned toll operator Jasa Marga and private real estate firm Lippo Karawaci received the 'aggressive' tag in their financial risk profiles.
- Not much capital spending growth between 2011 and 2013
- Conservative balance sheet, lack of depth in financial market also cause underinvestment
- RI firms also much less leveraged than regional peers
The S&P report also shows that in terms of debts, the Indonesian firms are much less leveraged than their counterparts in other countries as well, supported by data on the debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio.
The ratio is used to measure how many years a company needs to repay its debt by using its operating profits. 'In ASEAN, overall it's about 2.7 years. In Indonesia, it's less than one,' Jean said.
He added that the Indonesian firms still preferred to use their own internal cash flow to finance growth, adding that it was a stark contrast to what firms in Singapore and the Philippines did.
S&P corporate ratings managing director for Asia Pacific Michael Seewald said that the preference somewhat reflected the lack of depth in Indonesia's financial market.
Meanwhile, as the deadline approaches for the ASEAN Economic Community (AEC) in 2015, the S&P estimates that the integration will lead to higher penetration in the country's capital market and banking sector in the long term, opening the way for firms to source external funding.
It also predicts that as a region, ASEAN will see its gross domestic product (GDP) rise to 5.8 percent in 2016 from 4.9 percent estimated this year.
At the same time, Indonesian companies will face higher competition from their counterparts, which view the country as an attractive, growing market.
'The biggest companies that we have reviewed should be pretty sheltered because they're very big and very well-established. However, we believe that Indonesian companies a whole will potentially be more at risk with increasing competition,' Jean said.
Light manufacturing ' such as consumer products and small capital goods ' and services are two sectors that the S&P estimates will see high competition due to the business potentials offered.
