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Analysis: As infrastructure spending rises, buy banks, toll roads, cement
The Jakarta Composite Index (JCI) has rallied 11 percent year-to-date (YTD), outperforming most of its ASEAN peers
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The Jakarta Composite Index (JCI) has rallied 11 percent year-to-date (YTD), outperforming most of its ASEAN peers.
The JCI now stands at 17 times price-earning ratios (PERs), or 15 times the PERs estimate for 2018, close to +1SD above its past five-year mean and this is admittedly not cheap. Therefore, we advise investors to focus on stock selection and use a bottom-up approach to optimize absolute returns.
We like infrastructure-related stocks with large market capitalizations and selected consumer brand names.
We maintain our end-of-year forecast of the JCI at 6,300 based on 18 times PER by the end of 2017 estimate with 7 percent upside potential.
In the second half of 2017 and the first half of 2018, the first major theme vital to the economy will be higher government spending on infrastructure.
Indonesia is set to hold its next presidential election in April 2019, with campaigns likely to start in the fourth quarter of 2018. Therefore, we believe the second half of 2017 and the first half of 2018 will be a crucial one-year period for the current administration to go all out and enhance its “report card.”
Two of the greatest achievements by President Joko “Jokowi” Widodo in the first half of 2017 were pulling off a highly successful tax amnesty program, which resulted in more dollars in the budget to spend, and successfully securing Indonesia’s credit-rating upgrade to investment grade from Standard and Poor’s (S&P), which will open doors to new investment and lower costs of funds.
As these have been achieved, and the fiscal deficit target for 2017 was also relaxed to between 2.7 percent and 2.9 percent of gross domestic product (GDP), we believe it is time to re-focus on infrastructure spending. The new 2018 draft budget is also supportive of this.
The second major theme is the recovery in people’s purchasing power. We note that the coal price has started to rebound above the depressed level of US$ 50 per ton seen in the third quarter of 2016.
With the expected “one-year time lag,” its trickle-down impact on consumer spending will start from the third quarter of 2017. For example, domestic motorcycle sales were already strong both in June and July 2017.
The recent revelation of an increase in energy subsidies for 2018 is also positive for a spending recovery as most likely there will be no more subsidy cuts for electricity and fuel.
Pertaining to the first theme, we prefer banks — Bank Mandiri (BMRI) and Bank BRI (BBRI); toll roads — PT Jasa Marga (JSMR) and supporting materials or equipment like cement — Semen Indonesia (SMGR) and heavy equipment — United Tractors (UNTR), rather than direct contractors, which tend to be relatively small with stretched balance sheets.
Regarding the second theme, our picks are autos — Astra International (ASII) and some consumer brand names, namely PT Gudang Garam (GGRM), PT Mitra Adiperkasa (MAPI), PT Surya Citra media (SCMA) and mass-market property PT Ciputra Development (CTRA).
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The writer is the acting head of equity research at Bahana Sekuritas
