T

he Chinese believe that 2012, the year of the dragon, will bring both health and wealth. To realize this prophecy and help investors profit this year, we have conducted currency sensitivity analysis (exhibit 1) on all 70 Indonesian stocks under our coverage (80 percent of the Jakarta Composite Index’s total market capitalization), particularly given the propensity for stronger US dollar (US$) amid the European debt crisis.

In our view, for as long as the Euro zone turmoil persists, the US$ will remain strong. In 2011, the US$ appreciated 1.1 percent against the Rupiah (IDR), despite BI having spent some of its ammunition to defend the local currency which resulted in Indonesia’s foreign exchange reserves being depleted by US$14 billion to $110 billion at present.

In 2011, the IDR closed at 9,075 against the US$, performing relatively well compared to other currencies in the region. However, in 2012, the IDR has further dropped to Rp 9,205, weakening by 1.4 percent against the US dollar, making it the worst performing currency in the region.

Amid local currency weakness and gyrations, we have conducted sensitivity analysis to help investors gauge which stocks would benefit from stronger dollar and those that will perform worse. On the market as a whole, our study shows that every 1 percent IDR weakness beyond our average base case assumption of IDR8,950 (Bahana’s end-2012: IDR8,800), non-financial stocks will lower market Earnings Per Share (EPS) by 0.6 percent, reflecting 14.4 percent EPS growth from 15.1 percent at present (i.e. assuming ceteris paribus).

In an IDR depreciating environment, dollar earners in general have the tendency to benefit. Based on our analysis, plantation, oil-related and mining counters benefit most (top of exhibit 1): BW Plantations (BWPT-BUY-IDR1,190-TP:IDR1,450), AKR Corporindo (AKRA-HOLD-IDR3,300-TP:IDR3,150), Aneka Tambang (ANTM-HOLD-IDR1,690-TP:IDR1,750), Gozco Plantations (GZCO-HOLD-IDR265-TP:IDR300) & London Sumatra Indonesia (LSIP-BUY-IDR2,325-TP:IDR2,750).

However, we caution investors that the gains from IDR weakness could easily be offset by lower commodity prices, which tend to occur with stronger US$.

Worth noting is that Indonesia’s bell-weather stock, Astra International (ASII-BUY-IDR75,600-TP:IDR88,000), as an automotive distributor, does not have dollar costs. This benefit is amplified by substantial dollar contribution from Astra Agro Lestari (AALI-HOLD-IDR21,750-TP:IDR20,750) and United Tractors (UNTR-BUY-IDR28,200-TP:IDR30,000), allowing Astra International on a consolidated basis to gain in an IDR depreciating scenario.

 With the exception of Pelat Timah Nusantara (NIKL-HOLD-IDR280-TP:IDR280), which suffers from a low-base effect, our top five losers in an IDR weaker setting are stocks with high US$ loans: Bakrieland Development (ELTY-HOLD-IDR140-TP:IDR110), Bakrie Sumatra Plantations (UNSP-HOLD-IDR300-TP:IDR275), Sarana Menara Nusantara (TOWR-BUY-IDR10,000-TP:IDR14,600), Gajah Tunggal (GJTL-HOLD-IDR2,925-TP:IDR3,300) and Indosat (ISAT-REDUCE-IDR5,400-TP:IDR4,500). In aggregate, these five counters have US$3.1b debt, 17 percent of total 9M11 US$ loans within our coverage. Note that we only have one buy recommendation out of these five counters.

Amid foreign exchange movements, investors’ safe haven can be found in companies which report in dollar accounting, unaffected by movements in exchange rates. That said, comfort can be found by investing in the following five dollar-accounting counters: Adaro Energy (ADRO-BUY-IDR1,810-TP:IDR2,500), Bumi Resources (BUMI-HOLD-IDR2,475-TP:IDR2,375), Vale Indonesia (INCO-BUY-IDR3,350-TP:IDR4,000), Indo Tambangraya Megah (ITMG-BUY-IDR39,800-TP:IDR49,900) and Medco Energy (MEDC-BUY-IDR2,475-TP:IDR3,200). Happy trading!

The writer is senior vice president and head of research at PT Bahana Securities