Heading into 2018, we upgrade Indonesia’s consumer staples sector from “neutral” to “overweight” and maintain our stance on the discretionary sector, due to several key factors.

The first factor is that the 33 percent year-on-year (yoy) increase in 2018 social assistance budget will likely raise the average size of the consumer wallet as there will be more recipients of noncash staples vouchers.

Regional and presidential elections in 2018 and 2019, respectively, become the second factor that will likely lead to an increase in money in circulation during campaign seasons. The third factor is that there will be more recipients of the 900 volt-ampere (VA) electricity subsidy at about 2.4 million households from 6.5 million currently.

Continued strong growth of government spending to infrastructure in 2018 becomes the fourth factor to the better outlook of the consumer staples sector. Infrastructure spending will still grow by around 30 percent yoy next year based on a scenario of higher realization at about 75 percent to 80 percent of the total allocation in the 2018 state budget than the current annualized spending.

Fifth, there is a one-year time lag of the trickle-down impact from higher commodity prices, starting at the end of third quarter 2017, for consumption in 2018.

The last factor is a 2-percentage-point increase in the 2018 minimum wage hikes in real terms.

Based on the aforementioned factors, we believe the middle-low income segment will experience a recovery in purchasing power. However, we remain cautious on less job-creation and government policies in 2018 as well as a slower growth pace of store openings among modern-trade retailers.

Nevertheless, we note that the consumption trend has likely bottomed out and we are starting to see some green shoots emerging, such as the improving two-wheeler sales in third quarter of 2017 and the latest survey on fast-moving consumer goods (FMCG) sales data from Nielsen.

In our top picks list, we have a preference for consumer companies with exposure to the mass market. Hence, we continue to like Indofood CBP Sukses Makmur (ICBP) among staples, while in the retail space there are Matahari Department Store (LPPF) and Ramayana Lestari Sentosa (RALS).

Despite being a mass-market play, we remove Gudang Garam (GGRM), which we recently downgraded to “hold” from “buy” after its recent share price rally on the back of robust third quarter earnings this year and favorable new price-floor regulation.

We continue to like Mayora Indah (MYOR) for its growth of about 20 percent in earnings in 2018, supported by both domestic and export markets, as well as its strong track record in new product launches. However, thin trading liquidity on limited free float shares at 15.7 percent leads us to remove the stock from our list.

In line with President Joko “Jokowi” Widodo’s view, we see subsidy reform and channeling of savings into infrastructure spending as positive in the long run. However, the transition process has started to impact middle-low income earners and we could see these headwinds persisting in the near term.

We note that Pertamina has lowered the availability of subsidized fuel (RON-88 or Premium), which is substituted by RON-90 and above. The market share of Premium fuel decreased to 36 percent year-to-date this year from 87 percent in 2016.

As a result, the effective fuel cost to the average consumer has gone up by around 15 percent to 20 percent yoy. At the same time, the government has cut electricity subsidies through doubling the 900-VA capacity electricity tariff during the first half of this year.

These have severely impacted mass-market purchasing power, as seen in the weak performance of Ramayana Lestari Sentosa and Unilever. Ramayana recorded minus 0.9 percent year-to-date based on stock selection guide (SSG), while Unilever saw weak top-line growth with 3.7 percent yoy as consumers have been down-trading to smaller packaging or private labels.
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The writer is a research analyst at Bahana Sekuritas.