Domestic equity markets have just seen their corporate reports for the third quarter of the year. Eighty -four out of 99 companies within our coverage booked earnings. Those 99 companies represent 85 percent of the Jakarta Composite Index (JCI) market cap.

While most corporate earnings were disappointing, with 45 companies, or more than half, reporting results below our expectations, we found that for the market as a whole, the third quarter performance bottomed out and increased from the second quarter on a year-on-year (yoy) basis.

Actual operating profit growth in the third quarter yoy thus far has reached 6.1 percent (second quarter: -5.0 percent), vs. 8.8 percent in third quarter of 2014 (Table 1). On the bottom line, net profit growth decelerated from 10.9 percent in third quarter of 2014 to negative 5.9 percent in the third quarter of this year (second quarter of 2015: -7.5 percent).

The earnings slowdown was blamed on the depreciation of the rupiah against the US dollar and weak gross domestic product GDP growth, which we expect to come in at 4.72 percent (first quarter of 2015: 4.71 percent, second quarter of 2015: 4.67 percent; full year 2015: 4.72 percent).

In the third quarter of 2015, the biggest surprise came from the coal sector, which emerged as the best performing sector (Table 2), having benefited from the rupiah'€™s depreciation and low fuel prices. At the operating level, however, growth remained down compared to the level during the third quarter of 2014, when coal prices averaged higher at US$60.8/ton (the average price in third quarter of 2015: US$58.1/ton). Note that Bukit Asam (PTBA) and Adaro (ADRO) experienced higher coal sales volumes with lower
stripping ratios.

The second best performing sector was the infrastructure-related sector, which benefited from the completion of ministerial restructuring and budget disbursement acceleration. Additionally, they were positively impacted by margin improvements on a yoy basis due to higher own projects.

Moreover, companies like Adi Karya (ADHI) and Total Bangun Persada (TOTL) gained from the weak rupiah. However, as we still expect less robust results to come from Wijaya Karya (WIKA) and Wika Beton (WTON), which have not yet published their results due to limited review, the sector'€™s performance may not be as stellar.

Like infrastructure, the banking sector also experienced earnings acceleration in the third quarter on a yoy basis. However, we note that growth remained at single-digit levels, held back by slower loan growth and some provisioning on higher NPLs. Going forward, we expect NPLs continue to rise through the second quarter of 2016, which will likely weigh on future bank performance.

In the poultry sector, as predicted, we saw an operating-profit rebound on higher prices of day-old chicks (average price in the third quarter: Rp 3,345, 11 percent yoy) and broiler (average price in the third quarter: Rp 16,210, 5 percent yoy). Nevertheless, on the bottom line, a low base effect in the third quarter of 2014 was offset by rupiah depreciation.

For telecommunications companies, players benefited from solid revenue growth. Significant hikes in data revenue growth on a higher number of smartphone users and higher data usage accounted for this. However, for Telkom, the bottom line was hurt by high depreciation charges.

For property (Table 3), some companies suffered from slow revenue bookings while others from a surprise jump in operating expenses. Several companies suffered from high interest expenses, forex losses due to high US dollar borrowings as well as minority interests.

Another surprise came from the consumer sector (Table 4), which was also disappointing. However, a closer examination reveals that the sector'€™s performance was eroded by the consumer discretionary sector while on the flip side, staples were in s good section, having booked above-market growth rates at both the operating and net-profit levels.

For staples, support stemmed from their ability to implement price increases in spite of the weaker rupiah. In the discretionary sector, retail companies were burdened by depressed purchasing power, which weighed on top-line growth. For the media companies in our coverage, top-line performances were held back by weak GDP growth that resulted in single digit yoy adex growth.

In plantations, lower earnings were caused by low CPO prices that declined around 22.3 percent yoy to US$610.3/ton in the third quarter of 2015. Companies like Astra Agro Lestari (AALI), Salim Ivomas Pratama (SIMP) and London Sumatra Indonesia (LSIP) experienced weak growth on soft fresh fruit bunches (FFB) production due to lower margins compared to last year.

For the auto sector, weak performance in the third quarter of 2015 stemmed from slow auto sales on the back of weak purchasing power and a slowing GDP.

In the cement sector, continued weakness in commodity prices and the property market negatively impacted domestic cement sales in the third quarter. Additionally, the increase in production capacity by new and existing players has created greater competition, especially in Java, hurting companies'€™ margins.

For oil, it is clear that players were hurt by the current low-price environment, with the price averaging US$51.3/bbl in the third quarter, down around 50.4 percent yoy. Finally, on the metals front, the average nickel price in the third quarter was down 43.1 percent yoy to US$10,561/mt, impacting International Nickel Indonesia'€™s (INCO) profitability. Tin prices dropped 30.6 percent yoy to US$15,219/mt as China, the biggest tin consumer, experienced slow economic growth.

Overall, scarcity of growth has persisted and will result in further earnings downgrades in the market place going forward. That said, our top picks remain heavily weighed to staples and Telcos. However, we note that we are becoming more positive on both plantations and coal, which benefit from the current depreciation in the rupiah.

Thus, at this stage, we retain our 2015 index target at 4,700, before rising to 5,100 next year, in line with our 2016 earning per share (EPS) growth of around 10 percent. On valuation, the Indonesian market currently trades at 2016F PE of 16.7x. However, excluding Unilever (UNVR), we believe the market is more reasonable at 2016F PE of 13.1x.
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The writer is head of research at PT Bahana Securities.

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