Given current market volatility, we think corporate earnings will become important determinants for stock-price movements going forward. In this regard, the earnings season in the third quarter of this year (Q3 2014) is already upon us (companies are required to report by the end of October), and we should soon see a slew of corporate results from our 93 listed companies under our coverage, accounting for 75 percent of total market capitalization of the Indonesia Stock Exchange (IDX).

To help investors better prepare for these result releases, we have conducted a study on Q3 2014 corporate earnings. Based on our projections (table 1), we expect Q3 2014 operating-profit growth for the market as a whole to reach 9.2 percent year-on-year (y-y), helped by a low-base effect in Q3 2013, which was hurt by last year'€™s June fuel-price hike. Similarly, for the bottom line, we forecast Q3 2014 net profit growth to rise to 9.1 percent from negative 0.1 percent y-y in Q3 2013.

The Good: metals, plantations, consumer, property.

Helped by the ore export ban, the metals sector experienced higher prices, which hugely benefited its earnings in Q3 2014, making the sector by far the best-performing one within our coverage (table 2). This is followed by the plantations sector, which apart from volume growth also benefited from higher crude palm oil (CPO) prices and a stronger US dollar. On the consumer front, we expect solid results helped by Indonesia'€™s continued resilient purchasing power, while on the cost front, lower commodity prices, in spite of rupiah depreciation, have helped to support margins. For property, we expect strong earnings stemming from strong marketing sales in the past couple of years. In the cement sector, we expect relatively solid earnings due to improved margins, as companies have been able to pass on the higher fuel prices that were introduced in June 2013.

The Bad: automotive, infra-related, telecom-related, oil-related.

This group contains four industries with mixed performances in terms of operating and net-profit results (table 3) relative to the market. For the auto sector, relatively solid growth is supported by the commodities-related subsidiaries of Astra International (ASII), despite continued depressed margins in the automotive sector itself due to intense competition, which has led to a price war. On the telecom side, we expect flattish growth at both the operating and net-profit levels on the back of weak margins in XL Axiata (EXCL) and Indosat (ISAT), caused respectively by Axis'€™ merger and low network utilization.

The Ugly: banks, poultry, coal-related.

In this last category, we expect the sectors to book earnings that are lower than the market'€™s. For the banks, we expect deceleration in earnings growth y-y caused by slower loan growth, margin contractions and higher provisioning on worsening non-performing loans (NPLs). On poultry, we expect margins to remain under pressure due to the adverse impact of the rupiah'€™s depreciation on the sector (80 percent of total COGS are imported), despite the industry'€™s cost plus pricing. Finally, for coal, we expect a protracted downtrend in coal prices to continue to hamper performance.

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

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