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Analysis: Q4 2014 corporate results: The worst in several years
With 93 out of 95 stocks under our coverage (76 percent of the total market capitalization of the index) having already reported their financial results for the fourth quarter last year (Q4 2014), it is safe to say that the last quarter was one of the worst result seasons in the past few years for the Indonesian stock market
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With 93 out of 95 stocks under our coverage (76 percent of the total market capitalization of the index) having already reported their financial results for the fourth quarter last year (Q4 2014), it is safe to say that the last quarter was one of the worst result seasons in the past few years for the Indonesian stock market.
More than 50 percent or 48 stocks booked Q4 2014 performances below our expectations, suggesting a worse-than-expected economic downturn for Indonesia. On aggregate, operating profit growth for our basket of stocks only reached 1.8 percent year-on-year (yoy) (Table 1), a deceleration when compared to 8.1 percent yoy growth reported in Q4 2013.
On the bottom line, Q4 2014's net profit growth of -3.2 percent yoy also deteriorated versus Q4 2013's level of 0.7 percent, mainly dragged down by sectors listed in Table 4, all of which we rate as underweight, with the exception of poultry.
We rate poultry as neutral, as it is currently undergoing an improvement in Q1 2015 on the back of higher prices of day old chicks, or DOCs (above 100 percent to around Rp 3,500/DOC in Q1 2015 versus Q4 2014) and broiler prices (above 35 percent to around Rp 17,500/kilogram over the same period).
The good: Property, metals and infrastructure
Of the three sectors listed in this category, which have booked above-market growth rates at both operating and net profit levels, property was the most surprising to us, mainly due to the performances of three stocks: PT Agung Podomoro Land Tbk (APLN) due to resolved construction and building licensing issues, Summarecon Agung Tbk (SMRA) due to faster recognition of the increased contributions of landed projects and Ciputra Property Tbk (CTRP), stemming from a new accounting practice on recurring income.
On the metals front, the sector was mostly boosted by the performances of Vale Indonesia Tbk (INCO) due to cost efficiencies and J Resources Asia Pasifik Tbk (PSAB) due to a production ramp-up as two of its new mines had started operations. Going forward, with quantitative easing (QE) in both Japan and the eurozone taking place, we expect money to be put into precious metals, allowing for further improved performance, particularly for gold/silver plays.
For infrastructure-related companies, we see a severe deceleration in terms of yoy performance mainly due to the election effect, which resulted in construction delays. However, the sector's above-market performance was mainly supported by forays into non-core businesses such as property and pre-cast.
The bad: Consumers, banks, telcoms and cement
There were four industries with mixed performances in terms of operating and net-profit results relative to the market (Table 3). In the consumer space, earnings, in line with our preference, were mainly supported by the staples' stability, which experienced accelerating growth in Q4 2014 compared to levels in Q4 2013. However, consumer discretion (retail/media) suffered on the back of swelling operating expenses such as salaries, utilities and rentals, which outstripped top-line growth (for retailers). For media companies, slower growth in ad-spending capped top-line growth while higher programming costs eroded margins.
In the banking sector, earning deceleration was caused by tighter liquidity, slower loan growth and increased provisioning. In the telcoms-related industry, we observed an improvement in Q4 2014 compared to Q4 2013 due to easing competition that resulted in support for average revenue per unit (ARPU) and margins.
Note that for the telcom retailers such as Tiphone Mobile Indonesia Tbk (TELE) and Erajaya Swasembada Tbk (ERAA), earnings were eroded by weak distribution margins from Samsung on an oversupply situation.
In cement, players suffered from weak volumes due to the election effect, while on the cost front, higher electricity tariffs squeezed margins. Looking at Q1 2015 performance, we expect margin weakness to persist due to the Jan. 2015 cement price cut of Rp 3,000/bag.
The ugly: Auto, plantations, oil-related, coal-related and poultry
In Table 4, the poultry sector was the worst performer, with weak DOC prices as well as poor margins attributed to US dollar-linked costs that suffered due to the rupiah's depreciation. However, we note that we expect a turnaround to take place starting in Q1 2015, supported by DOC and broiler price recoveries.
In the automotive sector, poor performance stemmed from unexciting volumes and weak margins as a result of escalating competition, which we expect to persist in Q1 2015. For the plantation sector, operating performance was dragged down by a weak average selling price (ASP) due to the lower global oil price and weak production volumes due to unsupportive weather conditions. Looking forward, we expect these negative trends in crude palm oil (CPO) to continue in Q1 2015.
In the oil-related sector, the operating performance was mainly dragged down by lower oil prices and asset write-downs. For coal, Tambang Batubara Bukit Asam Tbk's (PTBA's) sales of coal with higher calorific value to PLN supported the sector's operating performance, while a poor bottom-line performance resulted from impairment losses due to new accounting standards that resulted in the mark-to-market of assets.
In sum, we remain cautious on the Indonesian market in the lead-up to the expected US Federal Reserve rate hike, particularly given the weak rupiah. For every 1 percent of the rupiah's depreciation against the US dollar, we estimate that Indonesia's market earning per share (EPS) growth will decline by 0.8 percent.
Additionally, we are uncomfortable with the recent decoupling of the market performance and the rupiah, suggesting that the rise in the index is not going to be well supported by earnings. This is in line with weak corporate earnings growth as can be seen by the lower-than-expected Q4 2014 results, which we expect to persist into Q1 2015.
At this stage of the market cycle, our top picks are mostly defensives (staples and telcoms):
Telekomunikasi Indonesia Tbk (TLKM), Gudang Garam Tbk (GGRM), Kalbe Farma Tbk (KLBF), Indofood CBP Sukses Makmur Tbk (ICBP) and Indosat (ISAT), although we are starting to adopt a more positive view on precious metals due to QE in Japan and the eurozone.
Hence, our new inclusion of PSAB as one of our top picks. Additionally, we are positive on the shipping sector given President Joko 'Jokowi' Widodo's maritime measures, with Soechi Lines Tbk (SOCI) being added into our top-buy list. On a more negative note, we have removed Jasa Marga Tbk (JSMR), Wijaya Karya Tbk (WIKA) and PP (Persero) (PTPP) from our top-buy list on possible negative sentiment stemming from the government's tax revenue shortfall, leading to budget cuts in infrastructure spending.
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The writer is senior associate director/head of research at Bahana Securities
